Unemployment in the UK is projected to reach 5.3% this year, marking a significant increase from the previous forecast of 4.9%. This worrying trend is particularly concerning for young people, with unemployment among those aged 16-24 reaching nearly an 11-year high. The Office for Budget Responsibility (OBR) attributes this rise to firms cutting back on hiring rather than layoffs, disproportionately affecting new entrants to the workforce.
The OBR's forecast also predicts a slower economic growth rate, with GDP expected to increase by 1.1% in 2026, down from 1.4% in 2025. Inflation is projected to fall from 3.4% in 2025 to 2.3% in 2026 and 2% from 2027 to 2030. However, the OBR acknowledges the uncertainty surrounding these projections due to the ongoing Iran war, which could significantly impact the UK economy.
The OBR's committee member, Prof David Miles, highlights the market developments over the last week, making economic and fiscal outcomes more challenging. He warns of a material impact on inflation if energy prices continue to rise. The rise in unemployment is attributed to hiring cuts rather than layoffs, with a disproportionate effect on young people entering the job market.
The latest figures from the Office for National Statistics (ONS) show unemployment rising to 5.2% in the final quarter of 2025, the highest since 2021. Youth unemployment, in particular, is a cause for concern, with 16% of 16-24-year-olds now out of work. Economists suggest that the government's policies, such as equalizing the national minimum wage and increasing national insurance contributions, have contributed to this rise.
To address these challenges, the Chancellor, Rachel Reeves, plans to reform apprenticeship schemes to prioritize young people. The OBR also predicts an increase in the overall tax burden, with personal taxes accounting for half the increase, reaching the highest level on record. This decision to freeze income tax thresholds will impact more people, pushing them into higher tax bands due to inflation.
Despite the economic challenges, the OBR's committee member, Tom Josephs, clarifies that the increase in personal taxes is driven by the policy of freezing tax thresholds, which, combined with strong earnings, pushes up the tax as a share of GDP. The OBR also revises its forecast for net inward migration, predicting a reduction in the adult population by 2030, which will impact GDP growth.
