Labour Wanted a Calm Budget, but Trump Had Other Ideas
Julius Probst, PhD assesses the impact of war with Iran and what it means for the Labour Party's job market.
Photo Credit: Chris Lawton
While it is true that Keir Starmer inherited a bad economy, the policies that the Labour Party has implemented since gaining power have not exactly improved the U.K.’s economic situation.
The significant increase in the National Insurance contribution in 2024 slowed hiring and led to job losses across several industries, with retail and hospitality suffering the most. As a result, youth unemployment has surged to its highest level in more than a decade.
Domestic policy uncertainty before the 2025 Autumn Budget created another stumbling block for an already sluggish economy and even weaker labor market.
As the fiscal situation improved slightly over 2025 thanks to lower interest rates and higher tax revenues, chancellor Rachel Reeves may have hoped to deliver a calm Spring Budget. In line with a previous announcement, the U.K. government moved to one fiscal event per year — meaning that there weren’t any policy changes announced this week.
Instead, Reeves’ speech focused on the new economic forecasts provided by the OBR (Office for Budget Responsibility). Sidenote: Given what’s happening in the Middle East, those are outdated now — I will get to that later.
Labour’s intent was to mitigate further economic uncertainty and signal stable policy-making and sustainable public finances.
Well, Trump undid their plans — by starting a war with Iran!
What the economic outlook was supposed to look like
The OBR projections released yesterday show that the unemployment rate is expected to peak at about 5.3% by year-end, compared to 4.9% previously. Furthermore, unemployment will remain higher for longer and only gradually head back towards 4% by the end of the decade.
The tax and minimum wage hikes — which are causing a surge in employment costs — are key contributors to this more pessimistic labor market outlook.
In terms of GDP growth, OBR projections show a gradual increase from a somewhat sluggish 1% in Q1 to a more upbeat 1.6% by Q4, with GDP growth remaining in that ballpark in the years to come.
While inflation is still standing at 3% right now, various measures announced in last year’s Budget will lead to a substantial drop in April (lower rail fares, lower household energy costs).
Thanks to the decline in “administered prices” (prices set by the government), the OBR was projecting just a little over 2% inflation in 2026 and inflation at target in 2027.
Mission accomplished for the Bank of England (BoE)?
Not quite! Central to the forecast is the projection that energy prices would remain constant. Well, given what happened last weekend, we can safely throw that assumption out the window!
How the war with Iran is changing the picture
The war with Iran is causing what economists call a supply shock. With significant disruptions in the Middle East and the Strait of Hormuz closed for shipping, Europe is cut off from one of its main energy sources.
Consequently, oil prices surged and British gas prices have gone ballistic – up by 50% since last week!
Meanwhile, stock markets are tanking as traders anticipate higher inflation and lower growth.
The U.K. is particularly affected because domestic electricity prices are more dependent on the price of gas than in continental Europe. With inflation still above the BoE’s 2% target, monetary policy makers will be extremely hesitant to cut rates further even as the sluggish job market demands support.
Financial markets have already cut back on their expectations for monetary easing. Instead of three rate cuts this year, we might only get one! And the BoE will surely not cut in March but postpone it to early summer or later, which will give policy makers more time to assess the inflationary impact of the turmoil in the Middle East.
This also means that the government will face higher borrowing costs, which could wipe out a chunk of the fiscal buffer that the chancellor would otherwise be utilizing this year!
What’s the impact on growth and the job market?
The U.K. labor market has basically been in a recessionary state for a while — certainly from a hiring perspective. In my last piece, I provided evidence that we might finally have reached a turning point.
Alas, the geopolitical events that have unfolded might prove me wrong. What the U.K. economy needs is lower interest rates, which would support consumption, investment, and therefore job growth.
But with the inflationary shock we are facing, the BoE has little choice but to pause rate cuts for now. This, in turn, has implications for consumers and businesses alike: higher interest rates will hold back private sector investment, the housing market, and consumer spending.
And all of this trickles down into a labor market with more sluggish job growth going forward.
What does that mean for recruiters?
The war with Iran is yet another sign that the global economy has fundamentally changed since 2019. The world has become more uncertain and geopolitical shocks more common. And we probably should not expect a return to normal any time soon.
In this environment, companies will act with more caution and hold back on big investment and hiring decisions that could easily backfire. Being a small and open economy, the U.K. is relatively exposed to global economic conditions, which means global shocks like the one we are experiencing right now will continue to be a headwind for recruitment.