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Rising funding costs, rising gas prices and a record-breaking tax raid on UK businesses bode ill for the UK economy in 2025.
UK borrowing costs - measured by the yield on ten-year government bonds - have reached the highest levels since the financial crisis, surpassing levels achieved under the ill-fated Liz Truss government.
Rising bond yields highlight investor anxieties towards the UK, which desperately needs stronger growth to boost the government's tax revenues.
With the cost of financing debt exceeding expectations, economists now overwhelmingly believe that Chancellor Rachel Reeves will break her debt rules and will have to raise taxes again at some point.
"An economic crisis in the UK is looming," says economist Andrew Sentance, a former member of the Bank of England's Monetary Policy Committee. "Lack of confidence in financial markets is a big issue for Rachel Reeves. But she shows no interest in the issue and ploughs on regardless."
The calls come as businesses steal themselves for a record-breaking tax raid in 2025 as the measures announced by Reeves in the October budget are enacted.
Businesses face the biggest year-on-year increase in the tax burden since the minimum wage was first introduced in 1999, as the overall tax burden for minimum wage workers reaches a record.
Surging Cost of Jobs
The cost of employing a full-time worker on minimum wage will rise by £2,367 this year to more than £24,800 per person, with more than £5,000 of that going to the Treasury, according to a new analysis by the Centre for Policy Studies (CPS).
21.3% of the money businesses pay on employing minimum wage staff will go to the Treasury in taxes, up from 17.5% last year.
Reeves’s decision to increase the rate of employer National Insurance contributions and raise the threshold at which it is paid disproportionately hits those on lower wages.
The changes mean that an employer's National Insurance bill for each full-time employee on minimum wage will surge by 60% this year, rising from £1,617 to £2,583.
The Chancellor’s decisions will raise an extra £25BN in taxes from businesses by 2029, which is described as one of the largest single tax increases in British history.
Employers must also look to cover a 6.7% increase in the National Living Wage.
Taken together, the overall cost of employing a full-time minimum wage worker will rise by £2,367 per year.
Shot Confidence
Chancellor Reeves and Prime Minister Keir Starmer's strategy on assuming power was to talk down the economy and create a narrative to justify a massive tax raid.
The warnings hit sentiment, a key driver of the animal spirits that are crucial to investment and economic growth.
Sentiment did not recover following the October budget when the final details of the £40BN tax raid were announced, and the economy has flatlined.
Labour inherited an economy that was growing strongly, but by the third quarter, growth had shuddered to a halt at 0.1%, with subsequent monthly GDP readings pointing to 0% growth being likely in the final quarter of the year.
"Our sales over Christmas were very different compared to previous years. Less people are spending money, and purchases seem more considered and less frivolous. There’s plenty of people around browsing, but we have definitely seen a decline in sales. There's not much confidence out there right now," says Beth Hillier, owner of Aloft, a small retail business.
Yet More Taxes Needed
With GDP likely to disappoint, the Treasury's expected tax take will invariably decline.
The full scale of the hit is not yet known as there is uncertainty as to how businesses will respond to the additional costs. If they chose to let employees go and cut back on hiring, the Chancellor could see revenues disappoint.
Should businesses choose to raise prices, inflation could beat expectations, prompting the Bank of England to pare ambitions to cut interest rates.
This pushes up the cost of inflation-linked government debt and bond yields.
"The UK's debt dynamics are among the worst of the advanced economies, and higher market interest rates have already eaten some of the headroom against the fiscal rules. The Chancellor will come under pressure to implement further tax hikes," says Andrew Goodwin, Chief UK Economist at Oxford Economics.
An annual Financial Times poll of 96 leading economists found that all but a handful said Reeves would increase taxes again before the next general election.
Reeves faces a "dawning realisation" that without income tax and VAT rises, "we cannot make the damn sums work," says Andrew Oswald, Professor of Economics and Behavioural Science at Warwick University.
Next (LON:NXT) Spring's spending review could be when the next bout of pain lands.
On taking power, the Chancellor launched a multi-year Spending Review, which is to conclude in Spring 2025 and set spending plans for a minimum of three years of the five-year forecast period.
"To avoid worsening this situation, the Chancellor may need to raise taxes again in 2025, perhaps as soon as next spring's fiscal event if movements in market pricing further erode the Chancellor's headroom," says Goodwin.
And Now, Gas Prices Rise to Two-year Highs
The first day of trade in 2025 brought an unwelcome development: wholesale gas prices extended a multi-month rise by spiking to a two-year high. Wholesale gas prices rose to £126.190 per therm on January 02, the highest level recorded since January 2023.
Rising prices represent a potential new headwind to the UK economy, with businesses already facing higher taxes and a rise in the minimum wage.
The EU and UK are now left exposed to global Liquified Natural Gas (LNG) market dynamics and will have to compete with Asia for supplies.
Capital Economics says this will keep energy prices elevated.
"Although we expect EU natural gas prices to fall substantially as and when conditions in the global LNG market loosen, anticipated increases in LNG supply have been beset by delays in recent years," says David Oxley, Chief Climate and Commodities Economist at Capital Economics.
UK energy bills are about 50% higher than pre-Covid levels, and analysts predict household bills will rise by a further 3% in April.
New research by the Centre for Retail Research (CRR) shows that 13,479 shops closed in 2024, equating to roughly 37 shops a day, and it has forecast that over 17,000 shops will close in 2025.
"We should be seriously concerned about the prospects for Britain's economy right now," says Wes Wilkes, CEO at Net-Worth NTWRK. "We have a government that hammers business and entrepreneurship with damaging fiscal policies."
An original version of this article can be viewed at Pound Sterling Live