(Bloomberg) -- UK household incomes will be held back by budget tax increases in a blow to Prime Minister Keir Starmer’s new goal of “raising living standards in every part of the UK,” according to the Confederation for British Industry.
Starmer introduced the living standards target in a speech on Thursday, shifting the focus off his election manifesto pledge to deliver the highest sustained growth in the Group of Seven during Labour’s first term in government.
However, the CBI warned in forecasts published Friday that the “budget measures will weigh on household spending, due to weaker incomes growth.” The employers’ group added that a trade war with the US under Donald Trump posed only a small threat to the UK.
Chancellor Rachel Reeves raised taxes by £40 billion ($51 billion) a year and borrowed an extra £30 billion, which she said “wiped the slate clean” after years of Conservative rule by providing the funds to fix ailing public services and invest in essential infrastructure. But she faces a backlash from business, which bears the bulk of the tax rise.
Living standards still improve over the next two years but by less than previously expected because firms will now pass on a £26 billion payroll-tax hike in higher prices, slower wage growth and softer hiring, the CBI said. Higher inflation will also slow the pace of interest-rate cuts, it added.
The CBI downgraded its 2025 growth forecasts to a “steady yet unimpressive” 1.6% from 1.9%, blaming the budget hit to consumer spending and business investment. It projects 1.5% growth in 2026. In both years, the UK trails the US and Canada in the G-7, separate forecasts by the OECD this week showed.
A trade war that sees 10% tariffs on all goods exports to the US and an equal retaliation by Britain would slow growth by just 0.1 percentage point in 2026 and add 0.1 to inflation. “This reflects the fact that the majority of the UK’s exports to the US are in services. However, some UK sectors that are more exposed, such as pharmaceuticals, would see a more noticeable negative impact.”
Louise Hellem, the CBI’s chief economist, said Starmer’s decision to switch the focus of his economic target was justified because the fastest growth in the G-7 was “quite hard to achieve” given the pace of expansion in the US. The new regional living standards goal made sense because it is “more domestically focused.”
To lift household incomes, ministers need to take action to improve productivity, including reform of the planning system, business rates and the apprenticeship levy, Hellem said. The CBI said the bumper increase in employer National Insurance Contributions will reduce business investment in 2026 by around £6 billion, though higher government spending will help support the economy.
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