What does rising unemployment mean for Rachel Reeves’s Budget?

Unemployment in Britain is up, driven primarily by a reduction in the number of jobs in the economy (rather than a sudden increase in people looking for work). At 5 per cent of the workforce, unemployment stands close to a post-pandemic high, though in historical terms it remains relatively modest – and way lower than in the 1980s and 1990s, and comparable to the benign Blair-Brown era (albeit the trend is in the wrong direction).

Over the past year, the economy has lost some 180,000 jobs – with 32,000 gone in October alone, indicating an accelerating trend. It is gloomy news just before the Budget, but there are also aspects that will be more encouraging for the chancellor…

Some of it. Economists agree that the unexpected hike in employers’ national contributions by 2 per cent last year certainly had an impact on hiring decisions; the so-called “tax on jobs” did increase costs for employers, not all of which could be passed on in higher prices. In some sectors, such as leisure and retail, higher minimum wage rates will also have had some impact, while the general lack of confidence and uncertainty about tax rises has inevitably depressed business confidence and investment.

Arguably, the impending workers’ rights legislation may also have deterred hiring, but the new law is yet to take effect.

However, global insecurity means defence industry employment is up. So the chancellor’s decisions and “mood music” are thus part of the story, but so are the fiscal position she inherited and wider issues such as the longer-term lack of competitiveness in the economy.

Rising unemployment means lower tax revenues and higher benefit payments, and the significance of Tuesday’s weaker-than-expected numbers is that the economy is slowing, which makes it harder for Reeves to balance the books.

One particular challenge is that public sector pay deals are running at 6.6 per cent, albeit distorted by changes in settlement dates; as resident doctors prepare to go on strike again on Friday, it highlights how difficult ministers are finding it to deliver reform and efficiency savings.

Despite the slowdown and a weakening demand for workers, wage settlements remain higher than desirable – 4.8 per cent annually, including bonuses – and there remain shortages of skilled and unskilled labour in some parts of the country. But, in real terms, wages growth is slowing and, with increases in personal taxation certain to be imposed in the Budget, take-home pay and living standards will be squeezed again in 2026. From that will flow bad electoral consequences for Labour.

Certainly: prospects for lower interest rates. Weakening wage growth, plus a tough Budget that will take spending power out of the economy, mean increased downward pressure on inflation next year and beyond. This will encourage the Bank of England to make another small cut in interest rates, perhaps even before Christmas. With the next decision on rates very evenly split among members of the Bank’s Monetary Policy Committee, these developments might well swing the balance towards more cuts during 2026, which is good news for businesses and mortgage holders.

For Reeves, rate cuts would also mean some easing of two colossal burdens: interest due on the national debt, and raising money on the gilt markets. A devastating crisis in the public finances in 2026 is now a little less likely – hardly “trebles all round”, but Reeves will most likely keep her job even as many thousands are losing theirs.