UK fiscal headroom wiped out, NIESR warns

The Chancellor has already exhausted her fiscal headroom following November’s £26bn package of tax rises, according to new analysis from the National Institute of Economic and Social Research (NIESR), as weaker growth and a deteriorating labour market weigh on the public finances.

In its latest outlook, NIESR warns that the combination of slowing economic activity and rising unemployment has eliminated the margin previously available to meet fiscal rules. The think tank now expects unemployment to rise to nearly two million people this year, with the jobless rate climbing to 5.4%. Economic growth is forecast to slow to around 1.3% next year, below the pace needed to stabilise public debt without further fiscal intervention.

The projections come after a period of modest economic recovery. UK GDP expanded by 0.3% in the most recent quarter, signalling continued — but fragile — momentum following last year’s stagnation. NIESR cautions that this limited growth leaves the economy vulnerable to shocks, particularly as labour market conditions soften.

Rising labour costs are a central concern in the forecast. Higher employer National Insurance contributions and sustained wage pressures are increasing the cost of hiring, particularly for small and mid-sized businesses. NIESR notes that vacancies have fallen while labour supply has continued to expand, indicating weaker demand for workers and reduced confidence among employers.

Against this backdrop, business leaders are urging the Government to recalibrate its approach. Andreas Adamides, CEO of Helm — formerly The Supper Club — the UK’s largest network for high-growth founders, said policy should prioritise job-creating companies rather than add further cost pressures.

“Growth and hiring stall when businesses are burdened instead of backed,” Adamides said. “In light of the NIESR’s warning that the Chancellor’s fiscal headroom has already been exhausted following November’s tax rises, the priority must be to protect the businesses that create jobs, not pile on costs that force them to pull back.

“The economy’s modest 0.3% expansion shows there is underlying potential to build on. With a clear, business-first strategy from the Government, companies could invest, scale up and deliver jobs while providing the growth needed to protect the public finances.”

The warning adds to a growing debate over the sustainability of the Government’s fiscal position. While official forecasts following the Autumn Statement suggested a narrow buffer against fiscal rules, independent economists have increasingly questioned whether that margin can withstand weaker growth and higher welfare spending linked to rising unemployment.

NIESR’s analysis suggests that without a meaningful improvement in productivity or private-sector investment, the Chancellor may face difficult choices later this year. Further tax rises risk undermining business confidence, while spending restraint could weigh on already subdued economic activity.

For companies, particularly those in growth sectors, the outlook reinforces concerns that rising costs and policy uncertainty could delay hiring decisions and capital investment. With unemployment expected to rise further before stabilising, the balance between fiscal discipline and growth-led policy is likely to remain a central challenge for the Government in the months ahead.