- UK unemployment is forecast to peak at 5.3 per cent this year.
- Youth unemployment has climbed close to an 11-year high.
- Economic uncertainty and weaker hiring could weigh on growth.
Unemployment in the UK is expected to rise higher than previously estimated this year, with young people likely to feel the impact most, according to new projections from the Office for Budget Responsibility.
The government’s fiscal watchdog said the UK unemployment rate could peak at 5.3 per cent, slightly above its earlier estimate of 4.9 per cent published in November.
If the forecast holds, it will mark the highest unemployment level since the final quarter of 2020, when the UK was under Covid lockdown restrictions. Excluding the pandemic period, it would be the highest rate recorded since September 2015.
The update came alongside a downgrade to the country’s growth outlook. The OBR now expects the UK economy to grow by 1.1 per cent in 2026, compared with 1.4 per cent in 2025, before averaging around 1.6 per cent a year until 2030.
Inflation, meanwhile, is projected to ease gradually. The forecaster expects it to fall from 3.4 per cent in 2025 to about 2.3 per cent in 2026 and settle near 2 per cent from 2027 to 2030.
However, the OBR acknowledged that the projections come with significant uncertainty, particularly due to the Iran war and its potential effect on energy markets and the wider economy.
Prof David Miles, a member of the OBR’s budget responsibility committee, reportedly said recent market developments had moved “in the direction of making the economic and fiscal outcomes more difficult”, as quoted in a news report.
He added that higher energy prices could have a “material impact on inflation” if they continue rising and remain elevated.
Young workers bear the brunt
The rise in unemployment appears to be driven less by layoffs and more by weaker hiring activity.
Miles reportedly said many firms are slowing recruitment rather than cutting existing staff, a trend that tends to hit people entering the labour market for the first time.
“You would expect it to have a disproportionate impact on people joining the labour force and trying to find a job for the first time,” he reportedly said, as quoted in a news report. “There’s worrying numbers on youth unemployment in particular.”
Recent figures from the Office for National Statistics showed the unemployment rate rose to 5.2 per cent in the final quarter of 2025, the highest level since early 2021.
Young people appear to be most affected. Around 16 per cent of those aged 16 to 24 are currently unemployed, close to the highest level recorded in more than a decade.
Some economists suggest policy changes may have added pressure to youth employment. Efforts to narrow the gap between minimum wages for younger and older workers, along with increases in employer national insurance contributions introduced in April last year, may have made businesses more cautious about hiring younger staff.
Miles reportedly said such policies could “disproportionately increase the cost of employing very young people”, as quoted in a news report.
Tax burden set to climb further
Alongside the labour market projections, the OBR also warned that the UK’s overall tax burden is expected to rise in the coming years.
It forecasts taxes increasing from about 36 per cent of GDP to roughly 38 per cent by 2030.
That would represent the highest tax burden on record, exceeding the 37.2 per cent level seen at the end of the Second World War and standing nearly 6 per cent of GDP above pre-pandemic levels.
One key reason is the government’s decision to freeze income tax thresholds, which gradually pushes more people into higher tax brackets as wages rise.
Tom Josephs, another member of the budget responsibility committee, reportedly said the increase in personal taxes is largely driven by the policy of freezing tax thresholds combined with relatively strong nominal earnings, as quoted in a news report.
The OBR also revised its migration outlook after changes in how the Office for National Statistics measures net inward migration. The adjustment means the adult population could be about 200,000 smaller by 2030 than previously forecast.
Miles reportedly said this would reduce the overall size of the UK labour force and therefore lower the level of GDP.
However, he added that the impact on living standards may be limited, since a smaller population would broadly offset the reduction in overall economic output.
