The UK Economy: A Pre-Budget 2025 Overview
Professor Joe Nellis · Posted on: October 16th 2025 · read
As the Chancellor, Rachel Reeves, prepares to deliver her second Autumn Budget on 26 November, the UK economy stands at a delicate crossroads - stable but subdued, with progress evident in some sectors while underlying pressures remain unresolved.
Growth and Output
After a mild recession last year, economic growth has resumed but remains modest. The first half of 2025 showed slight gains in services, construction, and consumer spending, but manufacturing continues to lag behind. Quarterly growth has hovered close to zero, suggesting a fragile recovery that depends heavily on household consumption and public sector investment. Business confidence is slowly improving, though still dampened by high costs and policy uncertainty.
Inflation and Interest
Rates Inflation remains higher than the Bank of England’s 2% target, largely due to energy costs, food prices, and wage pressures. After easing earlier in the year, headline inflation has crept up and is likely to peak near 4% in the autumn, putting the UK at the top of the G7 league table. This position is expected to continue into 2026, maintaining a strain on real household incomes. The Bank of England has adopted a cautious stance - holding interest rates steady while signalling that future cuts will depend on clearer evidence that inflation is heading back to target.
"While mortgage costs have generally stabilised, affordability pressures persist, especially among first-time buyers. As the primary drivers of the housing market, the financial strains confronting first-time buyers has stimulated speculation that the Chancellor may be forced to reform stamp duty in the Autumn Budget."
Labour Market and Wages
Employment remains relatively high, but signs of softening are visible. Job vacancies have steadily decline month-on-month since May 2022, and some sectors - particularly retail, hospitality, and construction - are scaling back hiring. It’s too early to attribute this decline solely to developments in AI — instead, the rise in employment costs from an increase in the minimum wage and employers’ NICs is the most significant contributory factor.
Average earnings continue to rise faster than prices in nominal terms, though real wage growth is marginal once inflation is factored in. Labour shortages in health care, logistics, and skilled trades remain a constraint, suggesting that structural mismatches rather than headline unemployment may be the bigger challenge ahead.
Public Finances and Fiscal Outlook
Public sector borrowing remains significantly above pre-pandemic levels, with debt interest payments now consuming a growing share of government spending. Tax revenue growth has been weaker than expected, reflecting slower economic momentum. There is limited scope for further tax rises without dampening economic activity. The Treasury faces competing pressures: the need to rebuild fiscal credibility while also supporting the spiralling costs of public services, including the NHS and the welfare system, infrastructure, and energy transition commitments.
With interest payments on government debt projected to remain high, the Chancellor will have limited fiscal room for manoeuvre. It is likely that the Budget will focus on selective tax relief for investment, incentives for housebuilding and house purchasing, and measures to support productivity without loosening overall discipline and breaking the Chancellor’s self-imposed fiscal rules.
External Environment and Risks
The international context remains mixed. Global trade growth has slowed, and geopolitical tensions continue to cloud the outlook for exports and energy supply. On the positive side, falling shipping costs and stabilising commodity prices have eased some external cost pressures.
Outlook
Overall, the UK economy enters the pre-Budget period in a state of cautious resilience - neither overheating nor collapsing but treading a narrow path between inflation control and growth ambition. The key tests ahead are whether productivity can rise, whether business investment can recover, and whether fiscal policy can sustain stability without stifling the recovery.
If the Chancellor can align tax reform, public investment, and credible deficit reduction, the UK may yet shift from a risk of stagnation to a slow but durable expansion.
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