CHANCELLOR Rachel Reeves’s Budget will create short-term economic growth at the cost of higher inflation and lower wages, researchers say.

An increase in government spending will see growth shoot up to 1.3 per cent in 2025 before falling slightly to 1.2 per cent in 2026, said a think tank report published today.

The boost, however, may only be short term and is likely to reduce growth in the future, warned the University of Strathclyde’s Fraser of Allander Institute.

Its Deloitte-sponsored analysis said the measures announced by Ms Reeves in October are likely to spur on higher interest rates and inflation while suppressing wages, as businesses are likely to pass on the rise in employers’ national insurance to their workers.

Fraser of Allander Institute director Professor Mairi Spowage said: “The UK government was keen to present their Budget in October as supporting growth, and that they had avoided tax increases on working people.

“However, the analysis alongside the Budget shows that the impact of measures will reduce growth in the medium term and that tax increases will mostly be passed through to workers through less employment and fewer wage increases.

“The UK government will be hoping that improvements in public services will start to be felt, given extra public spending, and that growth will surprise on the upside to make future fiscal events easier.

“The reaction of businesses to the Budget, with taxation increasing as a concern, may make that more difficult.”

Douglas Farish, Deloitte’s head of tax in Scotland, added: “Demographic shifts and evolving workplace demands are straining labour markets, and the rise of AI is reshaping the skills businesses require, underscoring the need for adaptive workforce strategies that ensure innovation and productivity thrive alongside human expertise.”