UK Jobs in Freefall

The Economy Just Snapped – Again

When Labour came to power in July 2024, one of the first acts of the new government was to announce what they claimed to be a £22 billion “black hole” in the nation’s finances. The new Chancellor, Rachel Reeves, stated that this shortfall had been left behind by the previous administration. However, critics were quick to point out that much of this supposed deficit was self-inflicted.

Almost immediately after taking office, the government approved significant pay rises across the public sector, increases that alone are estimated to cost around £10 billion per year. While this was undoubtedly welcomed by many public sector workers, the timing of these increases – before any significant plan to stimulate economic growth – raised concerns among business leaders and economists alike.

Instead of focusing on ways to grow the economy, stimulate private sector investment, or encourage innovation, the government has opted to increase taxation. Rather than incentivising risk-taking or entrepreneurship, the new fiscal policies have placed heavier burdens on businesses, especially small and medium-sized enterprises (SMEs). One of the most notable changes has been a substantial rise in employer National Insurance contributions, effectively making it more expensive to hire staff.

This decision came on the back of an already heavy tax load. Only a year earlier, corporation tax had been increased from 19% to 25%, a significant jump that has had a chilling effect on investment and business expansion. In addition, income tax thresholds have been frozen, meaning that as wages rise with inflation, more people are being dragged into higher tax brackets. This phenomenon, known as “fiscal drag,” effectively results in stealth tax rises year after year.

For small business owners, the cumulative effect of these changes has been devastating. The dividend allowance – once a fairly generous £5,000 – has been whittled down to a mere £500, hammering those who rely on dividends as part of their income. Entrepreneurs and owner-managers who take on personal financial risk to create jobs are now finding themselves punished through a tax system that appears increasingly hostile to enterprise.

One of the most pressing issues is the rising cost of employing young people. Historically, hiring school leavers and training them on the job was a cost-effective way to grow a business. Employers could justify the time spent mentoring inexperienced workers because wage costs were relatively low. But that calculation has shifted dramatically.

The National Minimum Wage has risen steeply – by more than 56% in just six years, from £7.83 per hour in 2019 to £12.11 in 2025. This increase, averaging close to 10% per year, might appear progressive on paper, but for many small businesses with thin margins, it is proving extremely difficult to absorb.

Consider a small local garage employing a 19-year-old full-time on minimum wage. Last year, the total cost to the business, including employer National Insurance contributions, was around £19,200. This year, the cost has jumped to £23,170 – a staggering 21% increase for the exact same employee doing the exact same job.

When multiplied across a small workforce, these costs quickly become unsustainable. A business with five such employees might find that it is effectively paying the equivalent of a sixth worker’s wages simply to cover the additional tax burden. In practical terms, this means redundancies. A £12,000 annual increase in staffing costs could force a small firm to lay off one employee just to stay afloat.

Unsurprisingly, this is having a knock-on effect across the wider economy. Recent data from S&P shows that private sector output is expanding at its slowest pace since May of last year. The UK’s Purchasing Managers’ Index (PMI) sits barely above 50 – the threshold between growth and contraction. Anything below 50 would mean the economy is officially shrinking.

The trend is worrying. While the population continues to grow, the total number of jobs is contracting. Instead of debating how to accelerate job creation and push monthly job gains higher, policymakers are faced with the uncomfortable reality that the country is losing jobs month after month.

Digging deeper into the data reveals an even more concerning picture. Official statistics show that in the most recent month, total payroll jobs fell by 7,700. But this headline number masks the true extent of the decline. Jobs in manufacturing, retail, and hospitality – sectors that are vital to many local communities – are shrinking rapidly. Red and orange indicators across these industries suggest widespread and sustained job losses.

The only areas where job numbers are increasing are in government-funded sectors: administration, education, and healthcare. In just one month, over 53,000 jobs were added in these areas. Without this growth in public sector employment, the overall job loss figure would have been closer to 60,000 – a catastrophic number that would almost certainly have dominated news headlines had it been reported clearly.

What this means is that the private sector is shrinking rapidly while the government props up the employment numbers by hiring more public sector workers. This is not a sustainable solution. It is essentially shifting labour from productive, profit-generating industries into taxpayer-funded roles.

The situation is made worse by the looming prospect of even higher taxes. The National Institute of Economic and Social Research has warned of a new £50 billion “black hole” in the public finances, suggesting that the government may need to raise the basic rate of income tax from 20% to 25% in the next budget, with proportional increases to higher and additional rates.

Some think tanks have proposed alternative measures, such as increasing income tax by 2% while cutting National Insurance contributions by the same amount. While this might provide some relief to those in regular employment, it would shift a greater tax burden onto pensioners, landlords, and the self-employed.

Others have suggested a wealth tax – a 2% annual levy on those with assets over £10 million. Yet this proposal faces significant practical challenges. Valuing private businesses and complex asset portfolios could lead to years of litigation, and the overall revenue raised would be relatively small – around £20 billion, not even half of the amount required.

Worse still, such a tax could deter investment, drive wealthy individuals and entrepreneurs out of the country, and ultimately reduce the tax base further. The secondary effects could wipe out any short-term gains, leaving the economy in an even more precarious position.

This entire scenario can be likened to turning up at the scene of an electrical fire and attempting to extinguish it by throwing water on the flames. Not only does this approach fail to put out the fire, it makes it worse, spreading the electricity and increasing the danger.

The government’s approach has so far had precisely this effect: the initial £22 billion fiscal problem has now ballooned to £50 billion. Rather than pausing to reassess their strategy, ministers seem poised to double down by throwing an even bigger “bucket of water” on the crisis in the form of more tax rises.

Without the massive increase in public sector spending and hiring, the UK’s GDP figures would almost certainly have been negative, plunging the country into an official recession. The scale of government intervention is currently masking the severity of the situation, but this cannot continue indefinitely.

Inflation remains another pressing concern. While the headline rate has dipped slightly from 4.2% to 4.1%, this has largely been due to falling house prices and cheaper airfares, neither of which provide meaningful relief to households struggling with day-to-day expenses. Food prices are still climbing at over 5% per year, and transport costs – including train fares – are up nearly 9%. Energy prices, despite lower wholesale gas costs, continue to rise because of the way price caps are implemented.

In other words, the essentials that people cannot avoid paying for – food, rent, energy, transport – are all becoming more expensive, while discretionary spending collapses. This in turn further depresses private sector growth, as consumers cut back on non-essential purchases.

Simply raising taxes further will not solve this crisis. If anything, it will accelerate the downward spiral by discouraging investment and stifling the private sector’s ability to generate wealth. The only sustainable way out of this predicament is through growth.

Growth requires a business-friendly environment that rewards risk-taking, encourages entrepreneurship, and attracts foreign investment. It means making the UK an attractive place for companies to set up factories, create jobs, and innovate. It means encouraging individuals to reinvest wealth domestically rather than moving it abroad.

Populist calls for ever-higher taxes on “the rich” may be politically convenient, but they are mathematically incapable of filling the fiscal gap. Worse, they risk driving away precisely the people and companies whose investment is most needed.

For the average person earning £25,000 a year, a wealth tax on multimillionaires would make virtually no difference to their own financial position. What would truly improve living standards is sustained economic growth that raises wages, increases job opportunities, and reduces the overall tax burden by broadening the base of contributors.

The conversation must shift away from punitive taxation and towards policies that actually grow the economy. Without that shift, the UK risks sliding into a prolonged period of stagnation, declining competitiveness, and shrinking private sector employment.