The House of Commons is now adjourned for summer recess, but that has not stopped the economic news from coming in. Much of this news has been unwelcome for the economy, with inflation higher and economic growth lower than expected, and even larger challenges lying on the horizon.
This Insight looks at some of the economic data published this month, and places it in long-term context using the latest projections from the Office for Budget Responsibility.
Inflation remains higher than expected
Inflation, as measured by the Consumer Prices Index (CPI), rose to 3.6% in June 2025. This was its highest level since January 2024. As the chart on the left below shows, this puts the UK’s inflation higher than most EU countries (the EU average was 2.3% in June).
The UK’s inflation rate was higher than most analysts had expected, according to a poll carried out by Reuters. However, it remains broadly in line with the expectations of both the Office for Budget Responsibility (OBR) and the Bank of England (BOE), as the chart on the right above shows. Both organisations think that inflation will peak in the autumn of 2025 before decreasing towards the BOE’s target of 2%.
Fewer employees and fewer vacancies
Data from the Office for National Statistics (ONS) shows that the number of employees on payrolls in the UK fell by 135,000 in the 12 months to May 2025. The unemployment rate increased slightly to 4.7% in the three months to May 2025, continuing its upwards trend of recent months. Meanwhile, the number of vacancies also decreased in the three months to June 2025, continuing a three-year trend.
This picture of job shedding is supported by survey responses from businesses. S&P Global’s Purchasing Manager Index (PMI) publications for July report that businesses in the UK services and manufacturing sectors have been decreasing their workforces for at least eight months.
Economic growth also remains slow. The ONS’s monthly estimate suggested that the economy shrank by 0.1% in May. Although monthly estimates are volatile and should not be taken too seriously in themselves, the Bank of England said in June that GDP growth remains “weak”. The Bank also said that higher growth at the start of the year may have been partly caused by economic activity being moved earlier to avoid tax increases and tariffs on exports to the United States, rather than a sign of underlying economic strength.
Long-term spending pressures
On 8 July 2025, the OBR published the latest edition of its Fiscal risks and sustainability report. These reports come out every year and assess the main risks to the UK’s public finances over the long term.
This year’s report says that the UK’s public finances are in a “relatively vulnerable position”. This is largely because the UK already borrows more, relative to the size of its economy, than most other advanced economies (see the chart on the left below), and its levels of debt are also higher than at any point since the 1960s.
One of the main factors driving higher government borrowing is the UK’s increasingly ageing population. The OBR notes that the cost of the State Pension is already at historically high levels, and it is expected to rise further over the next 50 years or so (see the chart on the right above). However, there are other indirect factors that are also likely to put pressure on the public finances.
In particular, far more employees are now enrolled on defined contribution (DC) rather than defined benefit (DB) pension schemes than in the past. DB schemes have historically been more likely to hold government debt, as DC schemes are more focused on achieving an investment return rather than long-term safety. Because the shift to DC schemes has resulted in lower domestic demand for government bonds, the OBR believes that the government will have to offer higher interest rates on its bonds in the future in order to attract investors. By the 2070s, this could increase government debt interest spending by around £22 billion a year.
The OBR notes in its July report that other potential pressures on the public finances it had previously identified are now starting to happen. These include trade wars (as a result of new US tariffs), further geopolitical uncertainty, increases in defence spending, and cyberattacks. There are also additional costs associated with climate change and the measures the UK is taking to deal with its effects.
The OBR has warned that because of these factors, the outlook for the UK cannot be assessed only by looking at headline public finance measures. Instead, it argues, we should take into account that further shocks (largely negative ones) are inevitable and will need to be dealt with when they arrive.
About the author: Philip Brien Senior researcher at the House of Commons Library, specialising in public spending.
Photo by: rickdeacon via Adobe Stock