UK unemployment is forecast to surpass levels seen during the Covid-19 pandemic, according to a new analysis by JP Morgan, as businesses continue to grapple with the financial impact of tax increases implemented by Chancellor Rachel Reeves. The bank predicts the unemployment rate will reach 5.5 per cent by late spring, exceeding the 5.2 per cent recorded between October and December, according to the Office for National Statistics.
The forecast centres on the continuing effects of tax hikes, including the increase to the national minimum wage and a £25 billion national insurance tax rise introduced in the 2024 Autumn Budget. Allan Monks, chief UK economist at JP Morgan, stated that over a year has passed since the national insurance increase, yet the jobs market remains stagnant. He highlighted that the tax increase “disproportionately affected businesses employing higher proportions of lower paid workers,” particularly within the retail and hospitality sectors.
The assessment comes after a recent report revealed a record-breaking budget surplus of £30.4 billion in January, a figure attributed to increased self-assessment and capital gains tax receipts. However, this surplus has not translated into immediate relief for businesses facing higher costs. Rachel Reeves is scheduled to deliver her spring statement on March 3, 2026, where she will likely address the economic outlook.
Monks also pointed to the accelerating adoption of artificial intelligence as a contributing factor to rising unemployment, noting that sectors vulnerable to automation “look relatively weak.” The weakening labour market is expected to increase pressure on the Bank of England to accelerate its interest rate cutting cycle, economists suggest.
Monks believes the Bank should “at least remove policy restrictiveness with two more cuts by June,” adding that the unemployment rate could potentially rise further into the second half of the year. He did, however, predict a “belated job market recovery,” anticipating that a fading fiscal drag on job growth and increased business confidence would eventually lead to improved hiring decisions.
Further supporting a more dovish stance from the Bank of England, Alan Taylor, a member of the Monetary Policy Committee, indicated on Tuesday that “risks were shifting to lower inflation and higher unemployment.” He suggested the possibility of two or three further rate cuts before reaching a theoretical neutral level.
Rachel Reeves has previously refused to rule out further tax rises, stating it would be “wrong to start writing future budgets” so soon after the November Budget. However, she also indicated that the measures taken in the November Budget had increased the government’s “fiscal headroom,” potentially reducing the need for additional tax increases. The Office for Budget Responsibility (OBR) is due to provide an update on the UK economy on March 3, but will not offer an assessment of the government’s progress against its fiscal rules this time.
