Wage rises, AI job threats and tax pressures, inflation, public finances, outlook

10th November 2025

A new survey by the Chartered Institute of Personnel and Development (CIPD) shows UK employers are planning average pay rises of around 3% in the year ahead roughly in line with recent years.

At the same time, a significant minority of firms anticipate workforce reductions thanks to automation and artificial intelligence (AI) adoption.

One in six employers expect to cut jobs in roles such as junior managerial, clerical and administrative posts.

Moreover, the survey warns that further tax increases by the government could dampen hiring intentions and further reduce pay-growth prospects.
This trio of factors — moderate wage growth, job-cut risks from AI, and tax squeeze — paints a complex picture. On one hand, 3% pay rises suggest continued income support for households; on the other, shrinking hiring and tax burdens may constrain future growth and erode confidence. It also matters for inflation: wage growth feeds into cost pressures, while tax and employment shifts affect consumer spending and broader demand.

The UK labour market may be stabilising somewhat, but the threat of job displacement and tax headwinds means the underlying dynamics remain fragile.

Labour market signals: stabilising but still weak

The latest data from the Office for National Statistics (ONS) indicate the UK labour market is entering a more stable phase but that shouldn't be mistaken for strength. Employment rates (for ages 16-64) sit at around 75.1% in June-to-August 2025, while the unemployment rate nudged up slightly to approximately 4.8%. Meanwhile, job vacancies have fallen for many quarters and are now at levels that reflect weak hiring momentum.

Wage growth (excluding bonuses) in the private sector slipped to about 4.4% year-on-year for the three months to August, the slowest pace since the end of 2021.

What this tells us is households have some support from employment, but momentum is weak. Slower wage growth and fewer job openings mean consumer spending may soften. For the policymakers at the Bank of England (BoE), this suggests caution and that the labour market no longer looks overheated, but it hasn’t recovered enough to offer much buffer.

The implication is incremental adjustments in policy rather than bold moves; and for households and businesses alike, a "steady but slow" environment rather than a buoyant one.

Inflation remains elevated and a cost-of-living squeeze deepens

Inflation in the UK is still above the BoE’s 2% target. The CPIH (which includes owner-occupiers’ housing costs) stood at 4.1% in the 12 months to September 2025, while the CPI rose by 3.8% over the same period.

This upward pressure has several drivers. Rising food and drink prices (for instance, beef up nearly 25% in a year) are a major contributor. So too are “administered prices” costs that businesses pass through when regulated or government-influenced fees go up, such as water, vehicle tax, or energy bills.

Additionally, increases in the National Living Wage and employer National Insurance contributions feed into labour cost pressures, which firms may pass on.
The result is UK households continue to face a cost-of-living squeeze rising prices for essentials, modest wage growth, and the prospect of higher taxes or slow income growth.

In this environment, consumer spending may become more cautious, and businesses may struggle to raise prices without hurting demand.
For the BoE, this means the inflation fight is not yet over. Rate cuts may be delayed, meaning borrowing costs remain higher for longer — affecting mortgages, business investment and consumer confidence.

Public finances under strain — borrowing soars and tax rises loom

One of the more worrying trends in the UK economy is the deteriorating state of public finances. In September 2025, the government’s borrowing reached £20.2 billion — the highest September level in five years. Total borrowing from April to September hit nearly £99.8 billion, exceeding forecasts by £7.2 billion. Rising debt interest payments and elevated welfare spending were major contributors.

In this context, the Chancellor of the Exchequer faces a daunting task filling a potential £30-50 billion fiscal gap while balancing growth, tax burdens and spending demands. Though income tax, VAT and employee National Insurance are pledged to be stable, experts suggest tax rises in other areas (such as pension reliefs, inheritance tax, freezing thresholds) or spending cuts may be unavoidable.
The implication: either higher taxes, constrained public services, or both — none of which are ideal for growth. For households and businesses, uncertainty over fiscal policy may dampen confidence and investment. For the economy overall, it raises the risk of a “fiscal drag” where higher taxes and/or lower spending weigh on growth just when the private sector is subdued.

Put simply: the public balance sheet is weaker than many anticipated, and the next Budget (due 26 November) will be one to watch closely.

Economic growth outlook: modest at best and facing headwinds

Looking ahead, growth in the UK economy appears modest. One recent outlook from KPMG predicts GDP growth of around 1.2% in 2025 and only about 1.1% in 2026. The factors dragging growth include global uncertainty (e.g., trade tensions), weaker productivity, business investment softness, and domestic tax/borrowing burdens.

Exports, while initially strong, may face headwinds from tariffs (especially from the US), reducing the upswing momentum. The labour market’s softness, combined with high inflation and higher interest rates, suggests consumption growth may falter.
For businesses and investors, this means a “slow-growth” environment rather than expansion. For households, it means incomes may stagnate, borrowing may stay expensive, and cost pressures may persist.

From a policy viewpoint, there’s little room for error with low growth, high inflation and fragile public finances, the UK economy is in a challenging spot.

The outlook is not one of crisis, but of moderation and that modest pace leaves little margin for shocks.

In the UK today, the economic story is one of moderation and fragility rather than boom or bust. Wages are rising, but only modestly; jobs are stabilising, but hiring and investment remain weak. Inflation has fallen from its highs but remains stubbornly above target. The cost-of-living squeeze continues for households. At the same time, public finances are under pressure and economic growth is forecast to be weak.

From a blogger’s perspective this means: the narrative is not about explosive growth or sudden collapse, but about managing structural challenges — stagnating productivity, an ageing workforce, global trade shifts, domestic policy constraints. There are no easy wins. For households, business and policymakers alike, the focus now is on adaptation, resilience and careful choices: managing debt, controlling cost pressures, investing smartly, and being ready for slower growth.

For the next months, key things to watch: the upcoming Autumn Budget (tax/spend decisions), the next inflation prints, the labour market data (hiring, wage growth), and business investment trends. These will determine whether the UK navigates this phase smoothly, or slips into a lower-growth, higher-cost trap.