UK inflation is forecast to remain at 3.8% by the end of 2025, almost double the 2% targets set by both the euro area and the Bank of England. While the economy has shown resilience this past year, with balanced activity in spending and investment, prospects for 2026 look tougher—growth is expected to slow further as the government tightens fiscal policy and raises taxes to meet deficit reduction goals.

Experts anticipate at least £30 billion in fiscal consolidation to be announced in the Autumn Budget, mostly via tax increases. This is projected to trim about 0.2 percentage points off GDP growth, limiting 2026 growth to just 0.8%. With slow growth and stubbornly high inflation, the Bank of England faces a complex balancing act in monetary policy.

The UK government needs to simultaneously shore up business and consumer confidence, plug a massive fiscal gap, and stop inflation from spiraling. Rising costs of living, especially for utilities and services, are widening the inflation gap with the euro area, putting extra strain on UK households. Fiscal and tax strategy must be sharply targeted; otherwise, experts warn, economic recovery signals could be at risk.

Following the Budget announcement, citizens and markets alike will be watching for how new tax burdens are distributed, whether the cost of living will rise further, and how spending plans will adjust. Over the coming year, the UK faces a triple test: sluggish growth, persistent inflation, and a sweeping tax overhaul will challenge its economic resilience.