The UK jobs market is “in recession territory” and the Chancellor must act decisively ahead of the spring statement, a think tank has warned.

According to the Resolution Foundation, a downturn in hiring has meant the UK’s economic outlook has deteriorated markedly since the autumn budget in October 2024.

Its employment data suggests a hiring decline at a recessionary pace and GDP is now projected to drop by 1.2%, while CPI inflation and interest rate expectations have both risen by 0.4 percentage points from the Office for Budget Responsibility’s forecast at the time of the autumn budget.

These rising interest rates, combined with sluggish economic growth and diminishing tax revenues, are creating major challenges in meeting the government’s fiscal rules. This could prompt difficult policy decisions and Rachel Reeves now needs to introduce further fiscal tightening measures on 26 March, says the think tank.

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James Smith, research director at the Resolution Foundation, said: “The UK’s economic outlook has declined markedly since the budget last autumn. Weaker growth and higher interest rate expectations look set to turn the UK’s projected current surplus of £10 billion into a deficit of around £5 billion.”

The Foundation predicts this decline will prompt the Office for Budget Responsibility to adjust its forecast for the current balance, shifting from a £9.9 billion surplus in 2029-30 to a deficit of around £4.4 billion.

However, Smith insisted that Reeves must avoid hitting the living standards of lower-income families in the process of addressing the deficit.

He said: “With the jobs market in recession territory, lower-income households shouldn’t bear the brunt of any consolidation. Crucially, she should avoid turning the spring statement into a ‘sticking plaster’ Budget, with long-term thinking on welfare reform undermined by the quest for short-term savings that could cause real harm.”

Highlighting that the Chancellor could consider reducing expenditure before the Spending Review, the Foundation believes lowering the annual real increase from 1.3% to 1.2% between 2026-27 and 2029-30 would save £3 billion by 2029-30. However, it warned that with unprotected departments already facing £9.7 billion in cuts next year, further reductions could place strain on essential services like social care, policing and the justice system.

Rather than targeting incapacity and disability benefits to curb increasing expenditures and encourage employment, the government could prioritise tax increases, the Foundation suggested. Prolonging the freeze on personal tax thresholds until 2029-30 could generate around £8 billion, it highlighted. Notably, this approach would avoid impacting short-term living standards since its implementation would begin in April 2028, with 80% of additional revenue coming from households in the wealthier half of the income spectrum.

“And with Britain’s fiscal pressures more likely to intensify rather than fade away, continuing to rule out tax rises is going to make future budgets even more challenging to deliver,” added Smith.

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