The UK government is likely to lean on tax increases over the coming years to manage growing public spending demands, according to new forecasts from KPMG.

The firm’s latest UK Economic Outlook highlights a challenging backdrop for chancellor Rachel Reeves, who faces mounting costs for health and defence alongside higher debt servicing and the reversal of planned welfare and winter fuel payment cuts.

Economists at KPMG said the year began more strongly than expected but warned that momentum is fading. GDP is forecast to grow 1.2% in 2025 and 1.1% in 2026, held back by weaker global trade and cautious consumers. “While the economy showed resilience at the start of the year, the second half looks more uncertain,” said Yael Selfin, KPMG UK’s chief economist. “Elevated tax burdens, weaker global trade and cautious consumers are likely to keep growth subdued into 2026.”

The report predicts Reeves will raise taxes at the November Budget rather than pursue deep spending cuts, with further gradual increases likely over the next decade as the government seeks to stabilise the public finances. For entrepreneurs, this could mean higher business-related taxes, reduced reliefs or incremental levies rather than a single large hike.

KPMG also expects the Bank of England to cut interest rates once before the end of 2025, citing slowing growth and a weakening jobs market. It sees further reductions through 2026, bringing rates down to around 3.25% by the end of that year.

For small business owners and founders, the forecasts underline the need to plan for a prolonged period of fiscal tightening and cautious consumer demand. While borrowing costs may ease, steady tax rises could weigh on profitability and investment decisions. Entrepreneurs will need to focus on efficiency, resilience and market adaptability to weather a slow-growth, high-tax environment.