UK Economy Shrank 0.3% in April, Higher Taxes and Spending Cuts Expected
- TBA
- Jun 16
- 4 min read
UK economy shrank 0.3% in April, tax increases may save more
Due to tax changes and the impact of US tariffs, the UK economy shrank by 0.3% in April — the largest monthly decline since October 2023 — exceeding the 0.1% contraction forecast by City of London economists.
Liz McKeown, Director of Economic Statistics at the Office for National Statistics (ONS), noted that following the US tariffs, UK exports fell by £2 billion, marking the largest monthly drop on record since January 1997.
This data is undoubtedly a setback for Chancellor Rachel Reeves, who just last week outlined her economic growth plans in a three-year spending review. She attributed most of the unexpected contraction to the “uncertainty caused by tariffs.”
She said: “We know April was a challenging month… If you look closely at today’s data, you’ll see that both exports and production weakened, and that’s all down to the uncertainty brought about by global tariffs.”
Meanwhile, the Institute for Fiscal Studies (IFS) also warned Chancellor Reeves that if the UK economy continues to decline, it could trigger another round of significant tax increases and spending cuts.
The IFS raised a concern: under what it calls a “fiscal drag,” more people could be pushed into higher income tax brackets — because even if wages rise with inflation, the income thresholds at which people start paying more tax remain frozen. This is expected to generate about £10 billion in revenue per year by 2029.
In response, government sources did not deny that they might extend the freeze on thresholds, only saying that future tax and spending decisions will be announced in the autumn budget.
Council tax is expected to rise by 5% a year
Recently, the UK government released its latest Spending Review document, indicating that in the coming years, Council Tax could rise by up to 5% annually to cope with ongoing pressure on local services and policing budgets.
Although local councils have the discretion not to raise Council Tax to the maximum 5% limit, the document assumes that all councils will implement the full increase. Due to tight budgets, the majority of local councils already raised Council Tax by 5% for the new fiscal year starting this April. Some councils facing severe financial difficulties have raised it by even more, after securing central government approval or holding referendums.
In response, Chancellor Rachel Reeves emphasized in an interview that this cap was set by the previous Conservative government: “This is just an upper limit — local councils do not have to increase it by 5%.” However, she also stated that raising Council Tax is necessary to continue funding social care and maintaining essential public services such as policing.
It is worth noting that even though central government grants to local authorities have seen a slight increase (up 1.1%), the overall fiscal pressure remains high. This Spending Review projects that local councils’ total spending power will grow by 2.6%, including locally raised revenues such as Council Tax and business rates.
Steve Lynch, Acting Chair of the Police Federation of England and Wales, expressed concern: “This Spending Review was supposed to mark a turning point after 15 years of austerity, but it now appears that cuts are continuing — and the public will ultimately pay the price.”
Council Tax is a key funding source for essential local services such as social care, libraries, waste collection, and street cleaning. Due to severe budget deficits, since 2022, councils in Birmingham, Nottingham, Woking, Croydon, Slough, and others have issued Section 114 notices declaring effective bankruptcy.
UK unemployment rises to highest level in four years
According to the latest data released by the Office for National Statistics (ONS), the UK’s unemployment rate rose to 4.6% as of April this year, marking a new high since July 2021 and already exceeding the Office for Budget Responsibility’s (OBR) forecast for the highest unemployment rate this year. The current number of unemployed people in the UK has surpassed 1.6 million.
Meanwhile, figures from the tax authority show that in May 2024, the number of payrolled employees in the UK dropped by 109,000 — nearly double the revised figure for April (55,000) — registering the largest single-month decline in five years.
The period covered by this data coincides with the government’s increase in employer National Insurance contributions and the rise in the national minimum wage. Several business groups had previously warned that these tax hikes would increase costs for companies and could trigger a wave of layoffs, price increases, and a slowdown in wage growth.
Liz McKeown, ONS Director of Economic Statistics, said: “The labour market continues to weaken, with a marked drop in the number of jobs. Feedback from businesses shows that many are slowing their hiring pace and are in no rush to replace staff who leave.”
Despite the slowdown in wage growth, wages are still rising at 5.2%, significantly higher than the inflation rate of 3.5%.
Minister for Employment Alison McGovern said: “Since we launched the ‘Back to Work Britain’ plan six months ago, we have added 500,000 new jobs, economic activity is at a record high, and the increase in real wages since last July has outpaced the entire decade since 2010.”
However, market reaction shows that investors remain cautious about expecting an interest rate cut by the Bank of England next month. According to LSEG data, 90% of market participants expect rates to remain unchanged at the next meeting.
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