A report by the University of Strathclyde’s Fraser of Allander Institute predicts the UK economy will grow at a much higher rate in 2025 than previously expected, but the budget could be inflationary.

The institute’s economists are forecasting that growth in 2024 will end 0.9% higher and will be followed by 1.3% growth in 2025 and 1.2% growth in 2026.

The forecast for 2025 is a significant revision up from previous estimates, driven by large increases in government spending during 2025-26.

However, the report warns that this growth could be a short-term boost rather than leading to increased growth in the medium to long term.

Analysis of the information published alongside the UK Budget shows that in the medium term, the measures announced by the UK Government in the Budget will mean that inflation and interest rates are higher for longer and real incomes lower than would otherwise be the case.

Mairi Spowage, director of the Fraser of Allander Institute, said the measures in the October budget will reduce growth in the medium term and tax increases will mostly be passed through to workers through less employment and fewer wage increases.

“The UK Government will be hoping that improvements in public services will start to be felt, given extra public spending, and that growth will surprise on the upside to make future fiscal events easier.

“The reaction of businesses to the budget, with taxation increasing as a concern, may make that more difficult.”

Douglas Farish, head of tax for Deloitte in Scotland, said: “Businesses across the country are navigating somewhat of a balancing act, striving to attract and retain top talent while managing cost pressures and economic uncertainty.

“Demographic shifts and evolving workplace demands are straining labour markets, and the rise of AI is reshaping the skills businesses require, underscoring the need for adaptive workforce strategies that ensure innovation and productivity thrive alongside human expertise.“

Labour data

Pay growth rose again in November, boosting household incomes but pressuring the Bank of England to maintain high interest rates.

Real pay in the UK has risen at its fastest rate for more than three years on average, driven by strong wage growth in the private sector.

After accounting for the impact of inflation, pay packets increased on average by 3.4% on the year.

Growth in private sector earnings were stronger than wages for public sector jobs between September and November, according to the Office for National Statistics (ONS), compared with the same period the year before.

Despite a risk of higher wages pushing up inflation, the Bank of England is still expected to cut interest rates next month.

The figures show job vacancies fell for the 30th consecutive period, signalling a continued decline in opportunities for job seekers.

The UK’s unemployment rate was estimated to have ticked up to 4.4%, while the estimated number of vacancies dropped 2.9% to 812,000 from October to December, continuing the decline but still remaining above pre-Covid pandemic levels.

The Scottish unemployment rate estimate (16+ years) was 3.8%.