Friday, June 05, 2026
How Chancellor Reeves torpedoed the economy
The paper says that in its latest evaluation report on the accuracy of its economic forecasts, the OBR admitted to understating the scale of annual government borrowing by more than £60 billion in its March 2023 and March 2024 budget projections.
The OBR said that persistently higher than expected inflation and interest rates, both of which pushed up debt interest and welfare spending beyond what was anticipated, were partly to blame for the inaccuracies:
Lingering inflationary effects from the surge in global energy prices triggered by Russia’s invasion of Ukraine in 2022 were more pronounced than the OBR thought.
The economic forecaster said yesterday that it had “adjusted our analytical and modelling toolkit” to ensure this did not happen again in the wake of the US-Israeli war with Iran, indicating that Reeves, the chancellor, could be handed a sobering set of forecasts at the autumn budget if the conflict drags on.
The OBR said that the substantial rise in government spending Reeves announced in her first budget in October 2024 also pushed borrowing far beyond its previous projections.
In that budget, Reeves set out a huge increase in daily government spending and public investment expenditure of around £70 billion. The package was funded through a mixture of extra borrowing and tax increases, including a £25 billion rise in employer national insurance contributions (NICs).
In March 2023 the OBR predicted that borrowing would total £85 billion in 2024/25, £66 billion lower than the actual figure, and in March 2024 it predicted borrowing would reach £87 billion in the same year, £65 billion below the actual result.
Reeves’s decision to increase employer NICs is likely to have constrained the economy by much more than the OBR calculated when the policy was announced nearly two years ago. The UK economy expanded by 1.4 per cent in 2025, well below the OBR’s prediction of 2 per cent, which it admitted had been “too optimistic”.
“In broad terms, this could be because our pre-measures forecast was too optimistic, our assessment of policy effects was too optimistic, or some combination of the two,” the forecaster said.
Economists have blamed the NICs rise for pushing up unemployment in the UK by making it costlier to hire people, especially the young: the jobless rate among this group has hit an 11-year high of 16.2 per cent.
It is not as if the government were not warned. Back in early 2025, the Centre for Policy Studies predicted that the year ahead would be the most expensive on record for businesses who employ workers on the minimum wage, with the combined amount of tax paid by employees and employers for those on minimum wage being the equivalent of a shocking 21.3% of salary in 2025:
Since the minimum wage was introduced in 1999, the tax wedge has fluctuated. In 2010, it stood at 18% but the Coalition government reduced this to 11% in 2015, primarily by increasing the income tax personal allowance. Although this increased over time, owing to wages rising faster than the personal allowance thresholds, by 2024 the amount of tax paid per minimum wage worker stood at 17.5% of the salary – still lower than in 2010.
However, the rise in employer’s National Insurance in the Budget and the dramatic reduction in the threshold at which it is paid mean that 21.3% of the cost of employing a full-time worker on the minimum wage will go in tax. Coupled with increases to the minimum wage, it will cost businesses £2,367 more to employ a full-time worker on the minimum wage than it did in 2024, which will have an obvious impact on hiring decisions for the lowest paid.
For higher wage positions, the increased cost of hiring workers translates into lower wages over time. For those on the minimum wage, where salaries cannot fall, businesses will instead hire fewer workers, which limits the opportunities for those in low-paid work and the unemployed who are looking to get back into the workforce.
The choice made by the Chancellor to use employer's national insurance payments to fund public sector payment has had a direct impact on government debt and unemployment, hitting the lowest paid and young people hardest.
