A burst of government spending has delivered some long-awaited good news for Chancellor Rachel Reeves ahead of the Budget later this month.
The EY Item Club has lifted its growth forecast for this year, predicting the UK economy will expand by 1.5% in 2025, up from its earlier estimate of 1%.
The upgrade comes after stronger-than-expected growth in the first half of the year, when output rose 0.7%, the fastest in the G7.
The Item Club said the momentum was largely due to increases in government spending, with the Office for Budget Responsibility estimating total expenditure of £1.3 trillion this fiscal year and last, roughly £100 billion higher than in 2023-24.
However, the think tank warned that the upturn may be short-lived, with growth forecast to slow to 0.9% next year.
Forecasts for business investment growth are upgraded to fall from a forecast 3.7% this year to 0.8%, partially due to what the Club sees as uncertainty in the global economy and a challenging worldwide trading environment caused by tariffs, though this is higher than the zero growth forecast earlier in the year, thanks to further falls in the interest rate.
"Potential tax rises in the Autumn Budget could also impact private sector investment levels, albeit this will be highly dependent on the specific measures announced," the Club said, with business investment growth forecast to bounce back to 1.7% from 2027.
With Reeves facing pressure to fill a widening fiscal gap, the economists expect tax rises of up to £40 billion to offset higher borrowing costs and weaker productivity, with speculation mounting that income tax rates could rise despite Labour’s election pledge.
The Item Club said higher taxes, sluggish global trade and still-elevated interest rates would weigh on the economy in 2026, before growth stabilises around 1.3% in 2027.
Inflation is forecast to have reached its peak, with the headline rate cooling to 3.4% in 2025 and 2.7% across 2026, before reaching the Bank of England’s 2% target from 2027.
Unemployment is forecast to peak at 5% in the first half of 2026 before falling back to 4.7% by 2027.