UK on recession alert: Tax hike fears mount as GDP FALLS for the second month in a row - heaping pressure on Rachel Reeves

UK on recession alert: Tax hike fears mount as GDP FALLS for the second month in a row - heaping pressure on Rachel Reeves
By: dailymail Posted On: July 11, 2025 View: 50

Rachel Reeves suffered a fresh blow today as the economy slipped into the red for a second month in a row.

GDP was down 0.1 per cent in May, surprising analysts who had pencilled in a small expansion. 

It followed a 0.3 per cent drop in April. Economists said UK plc shrinking this quarter is now a 'racing certainty', although two consecutive negative quarters is the normal definition of recession. 

The Chancellor admitted the data were 'disappointing', as she desperately struggles to balance the government's books.

Fears were already running high of another major tax raid in the Autumn Budget, with estimates of a £30billion hole in the public finances. 

ONS Director of Economic Statistics Liz McKeown said: 'The economy contracted slightly in May with notable falls in production and construction, only partially offset by growth in services. 

GDP was down 0.1 per cent in May, following a 0.3 per cent drop in April
The economy has not seen any growth since March
The grim figures heap pressure on the Chancellor, who has been hoping that growth can help her balance the government books

'However, across the latest three months as a whole, the economy still grew. This reflected strength earlier in the year that resulted, in part, from some activity being brought forward to February and March.

'May's fall in production was driven by oil and gas extraction, car manufacturing and the often-erratic pharmaceutical industry.

'While services grew overall in May with a strong month for legal firms, which recovered from a weak April, and computer programming, these were partially offset by a very weak month for retail sales.'

Ms Reeves tried to put a brave face on the dire figures, listing government policies.

'Getting more money in people's pockets is my number one mission. While today's figures are disappointing, I am determined to kickstart economic growth and deliver on that promise,' she said.

'The choices we have made in our first year in government have seen us extend the £3 bus fare cap, fund Free School Meals for over half a million more children, press ahead with plans to deliver free breakfast clubs for every child in the country and increase the National Minimum and National Living Wage, giving a pay rise to 3 million workers.'

But shadow Chancellor Mel Stride said: 'Thanks to Labour's reckless choices the economy actually shrank in May. This will pile even further pressure for tax rises in the Autumn.

'Labour's costly U-turns, on winter fuel and welfare, have created a ticking tax timebomb.

'Under Labour, we have seen taxes hiked, inflation almost double, unemployment rise, and growth stagnate. With more taxes looming, things will only get worse and working people will pay the price.'

The tax burden is already set to hit a new high as a proportion of GDP after the last Budget imposed a £41billion increase - the biggest on record for a single package. 

But experts have suggested that the stalling economy together with spending pressures could mean Ms Reeves has a £31billion funding gap to fill 

Speculation is mounting that the Chancellor will opt to extend the long-running freeze on tax thresholds.

The policy, in place since 2022, is due to end in 2028-29. By that point it will have dragged an extra 4.2million people into the tax system as wages rise.

There will be 3.5million more taxpayers in the higher-rate band, and 600,000 in the top rate.

However, keeping the freeze in place for another two years could bring in an extra £10billion annually for the Treasury according to the IFS think-tank - significantly easing Ms Reeves' problems. 

Around another 400,000 more people would be paying income tax and 600,000 into higher and additional rates by 2029-30. 

Labour MPs are also baying for wealth taxes, despite warnings from the Treasury's OBR watchdog that huge revenues are already being raised from too narrow a group of people. 

Suren Thiru, ICAEW Economics Director, said: 'These downbeat figures undoubtedly increase anxiety over the health of the UK economy, with tumbling construction and manufacturing activity causing a disheartening decline in overall output.

'May's downbeat outturn means a contraction in GDP across the second quarter looks a racing certainty, as sinking business confidence amid intensifying geopolitical turmoil will have dampened growth in June, despite a boost from the warm weather.

'The UK's growth trajectory in the near term is likely to tilt downwards as any uplift from higher consumer and government spending is hampered by escalating business caution, amid fears of further tax rises in this Autumn's Budget.

'The lack of momentum in the UK economy indicated by these sluggish figures means that an August interest rate cut currently looks inevitable, despite the recent spike in inflation.'

Nicholas Hyett, Investment Manager at Wealth Club said: 'Some strength in the IT and professional services sectors mean services growth as a whole scraped into positive territory for the month. However, that was not enough to offset contractions in manufacturing and construction sectors, meaning the UK economy shrank unexpectedly in May.

The Treasury's OBR watchdog highlighted the impact of the tax threshold freezes in a report this week

Higher US tariffs seem to be causing some of the UK's woes, especially in car manufacturing - which faced the full brunt of tariffs early on. Changes to stamp duty have also weighed on the construction sector.

An optimist might argue these are one off headwinds - US tariffs on UK cars have already been softened, and the housing market will get moving again once its had time to adjust. The problem is that it's difficult to see what turns things around.

Higher living wages and employers national insurance may already be hurting labour intensive industries like retail and leisure. Despite markets hitting record highs, the macro-economic picture is uncertain and taxes look set to rise substantially at the next budget.

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