Britain faces a sobering unemployment forecast that could reach its highest level in five years, according to fresh analysis from KPMG. The professional services firm projects the jobless rate will climb to 4.9% by 2026, creating significant challenges for Chancellor Rachel Reeves’ economic strategy. This troubling unemployment forecast emerges as businesses confront potential tax increases and weakening labor market conditions.
Understanding the Unemployment Forecast Numbers
KPMG’s detailed analysis reveals a steady upward trajectory for UK unemployment. Currently standing at 4.7%, the rate is expected to gradually increase throughout 2025 before peaking at 4.9% in 2026. This represents a substantial rise from the 4.1% level recorded in August 2024. The consultancy firm emphasizes that this unemployment forecast reflects several converging factors:
- Falling vacancies across multiple sectors
- Business caution regarding new hiring
- Economic uncertainty affecting expansion plans
- Policy concerns surrounding upcoming tax decisions
Tax Policy Impact on Employment
Chancellor Reeves confronts a complex fiscal landscape as she prepares her Autumn Budget. The government already implemented a £40 billion business tax package, including increased employer National Insurance contributions. Many analysts describe these measures as effectively creating a ‘jobs tax’ that discourages hiring. Consequently, this unemployment forecast suggests businesses are responding cautiously to the current tax environment.
Moreover, the Treasury faces additional pressure from a potential £50 billion shortfall in public finances. This situation stems from weaker-than-expected economic growth and some policy reversals. The unemployment forecast therefore reflects broader economic challenges beyond immediate tax considerations.
Business Response to Economic Uncertainty
Companies across Britain are adopting a wait-and-see approach regarding recruitment. KPMG notes that many firms are delaying hiring decisions until after November’s Autumn Budget provides clearer policy direction. This cautious business behavior directly influences the current unemployment forecast. Specifically, organizations seek certainty on several key issues:
- Future tax obligations for employers
- Workers’ rights reforms and their implementation
- Economic growth projections for coming years
- Government spending plans and their economic impact
Political and Economic Challenges
Shadow Chancellor Mel Stride has criticized the government’s approach, accusing Reeves of being ‘asleep at the wheel’ regarding economic management. The opposition highlights concerns that current policies might hinder rather than help economic recovery. This unemployment forecast therefore carries significant political implications alongside its economic importance.
The Treasury maintains a different perspective, emphasizing its pro-business credentials. Officials point to trade agreements with major economies and business rate reforms as evidence of their supportive approach. They also highlight wage growth and minimum wage increases as positive developments for workers.
Future Policy Considerations
Several policy options remain under discussion to address fiscal challenges. These include extending income tax threshold freezes, which could generate approximately £8 billion annually. Other possibilities involve new levies on wealth, property, and investment income. Each potential measure carries implications for the unemployment forecast, depending on how businesses respond to changed economic conditions.
Former Treasury adviser James Nation warns that some tax increases, particularly on capital gains, would prove politically difficult. He compares such measures to inheritance tax in terms of potential public opposition. The government must therefore balance fiscal needs against economic and political considerations.
FAQs
What is the current UK unemployment rate?
The UK unemployment rate currently stands at 4.7%, according to latest official figures.
When does KPMG expect unemployment to peak?
KPMG forecasts unemployment will reach its highest point of 4.9% in 2026.
What factors are driving the unemployment forecast?
Key factors include falling job vacancies, business caution about hiring, economic uncertainty, and concerns about future tax policies.
How does this compare to previous unemployment levels?
The projected 4.9% rate would be the highest in five years, significantly above the 4.1% level recorded in August 2024.
What tax measures are affecting business hiring decisions?
Businesses are particularly concerned about employer National Insurance increases and potential future tax rises targeting companies and investors.
When will businesses get more policy clarity?
The Autumn Budget in November is expected to provide clearer direction on government tax and spending plans.
