Chancellor Rachel Reeves is confronting a severe deterioration in the UK labour market as she prepares her crucial budget, with new analysis suggesting her initial tax policies have exacerbated the very challenges she now aims to solve.
A Bleak Economic Backdrop
Official figures paint a grim picture for the Chancellor. The unemployment rate has now hit 5%, climbing faster than economists had predicted. There are significantly more people looking for work compared to a year ago, but far fewer job vacancies available.
While the rate of economic inactivity has seen a slight decrease, it remains stubbornly high by historical standards. This bleak economic record provides a difficult context for the Treasury's budget preparations, scheduled for the end of November 2025.
The Role of Government Policy
Sky News Business and Economics Correspondent Gurpreet Narwan argues that the government's own actions have played a clear role in this downturn. Shortly after taking office, Chancellor Reeves initiated a substantial £25 billion tax increase on businesses.
The centrepiece of this fiscal move was a major rise in employers' national insurance contributions, coupled with an increase in the national living wage. Sectors like retail and hospitality immediately sounded the alarm, warning that the added costs would force them to raise prices for consumers and reduce their workforce.
Major employers, including Sainsbury's and Marks & Spencer, publicly stated that prices would have to rise. Subsequent business surveys consistently indicated a planned slowdown in hiring.
Warnings Become Reality
The Treasury initially believed businesses would absorb these costs by reducing their profit margins, especially in highly competitive sectors like retail. However, the data has not supported this assumption.
Not only has food price inflation persisted, but the jobs market has suffered significantly. Andrew Bailey, the Governor of the Bank of England, recently confirmed that the primary consequences of these policies are being felt in the employment sector.
HMRC payroll data provides stark evidence: 180,000 jobs have vanished from company payrolls over the past year. A staggering 40% of these losses were concentrated in the retail and wholesale sectors.
This erosion of the jobs market has a direct and damaging impact on the Treasury's own finances. The people who held those jobs are no longer paying income tax or national insurance, thereby weakening the overall tax base.
This creates a vicious cycle for a Chancellor who is actively seeking new revenue streams. The situation is further complicated by the 9.1 million people of working age who are currently not seeking employment, many of whom rely on out-of-work benefits.
Chancellor Reeves has consistently stated that economic growth is the only sustainable solution to the nation's fiscal challenges. However, analysts question how this growth can be achieved while job creation is moving in reverse.
With further tax rises being considered for the upcoming budget, the critical task will be to calibrate policy carefully to ensure that revenue-raising measures do not fatally undermine the growth agenda she so desperately needs.
