Unemployment rates in the UK are projected to soar to 5.3% this year, marking a concerning surge in young joblessness, according to the government's official forecaster. This prediction surpasses the previous estimate of 4.9% in November, indicating a challenging economic landscape ahead.
The Office for Budget Responsibility (OBR) highlights that this unemployment peak will surpass the levels witnessed during the final quarter of 2020, when the nation was under lockdown due to the COVID-19 pandemic. Excluding the pandemic era, it will be the highest unemployment rate since September 2015.
The OBR's forecast coincides with a downward revision of the UK's growth prospects. GDP growth is expected to reach 1.1% in 2026, down from 1.4% in 2025, and will average 1.6% annually until 2030. Inflation is projected to decline from 3.4% in 2025 to 2.3% in 2026 and 2% from 2027 to 2030.
However, the OBR acknowledges the uncertainty surrounding its projections, primarily due to the ongoing Iran war, which could significantly impact the UK economy. Prof David Miles, a member of the OBR's budget responsibility committee, warns that market developments have made economic and fiscal outcomes more challenging.
The rise in unemployment, Miles explains, is attributed to firms reducing hiring rather than layoffs. This trend disproportionately affects individuals entering the workforce, with a particular focus on youth unemployment. The latest figures from the Office for National Statistics (ONS) reveal a 5.2% unemployment rate in the final quarter of 2025, the highest since early 2021. Youth unemployment stands at 16% for those aged 16-24, a near 11-year high.
Economists attribute the youth unemployment surge to the government's efforts to equalize the national minimum wage for younger and older workers, as well as increased national insurance contributions for employers in April last year. Miles agrees, emphasizing that these policies disproportionately increase the cost of employing young individuals.
The OBR predicts that weak hiring will persist in the near term, with unemployment surpassing previous forecasts for every year until 2029, aligning with the November forecast of 4.2% before dropping to 4.1% in 2030. The government, led by Chancellor Rachel Reeves, plans to reform apprenticeship schemes to prioritize young people and announce reforms in the coming weeks.
In addition to unemployment trends, the OBR projects an increase in the overall tax burden from 36% of GDP to 38% by 2030, with personal taxes accounting for half the increase. This would mark the highest tax burden on record, surpassing the level at the end of World War II and nearly 6% above the pre-pandemic level.
The OBR attributes this to the chancellor's decision to freeze income tax thresholds in the autumn budget, affecting more people entering the tax system or moving into higher tax brackets due to inflation. Tom Josephs, another committee member, highlights that the increase in personal taxes is driven by the policy of freezing tax thresholds, combined with strong nominal earnings.
Furthermore, changes in how the ONS measures net inward migration have led to a lower forecast for overall net inward migration, with a projected reduction in the adult population by 2030 compared to the November forecast. Miles suggests that this will impact UK GDP growth, as a significant portion of the emigrating group was employed.
Despite the challenges, Miles reassures that the impact on GDP per person and the standard of living will be minimal, as the population reduction will offset the slight GDP decrease.
