UK GDP has grown faster than expected in 2025 and real household incomes are finally rising again after years of pressure. The Office for Budget Responsibility (OBR) now expects growth of around 1.5% in 2025, up from 1.0% in its March forecast.
Inflation is easing from its recent peak but remains above the Bank of England’s 2% target, with CPI at 3.6% in the year to October 2025. On the surface, that looks like “stability”. In practice, SMEs are still dealing with the compound effect of several years of elevated inflation, which is exactly why the level of prices, not just the headline rate, matters for business decisions.
We explored this in detail in our previous article, Why Cash is Still Killing SME Balance Sheets. Even as the CPI rate drifts lower, the cumulative erosion of purchasing power means idle cash is still losing value in real terms, and historic credit lines and reserves are worth far less than the nominal figures suggest. The Budget’s narrative about “falling inflation” must be read alongside this reality: inflation may be lower, but it is not neutral, and it has already reshaped what your working capital can actually buy.
At the same time, the UK’s public debt remains very high, and productivity growth has been revised down in the OBR’s forecasts. For SMEs, that mix matters. It affects:
- The cost of borrowing
- Wage pressures and hiring
- Customer demand and pricing power
- Tax policy and government support
- The real value of the cash and facilities sitting on your balance sheet
This article breaks down Chapter 1 of Budget 2025 into a straightforward SME playbook: the risks, the opportunities, and how to respond.
The headline economic story: modest growth, easing inflation, tougher backdrop
Growth: better than feared, still not booming
GDP has grown by 1.0% so far in 2025, with stronger performance early in the year and softer growth more recently.
The OBR now forecasts real GDP growth of 1.5% in 2025, then 1.4–1.5% a year through 2030.
GDP per capita is expected to grow by about 1.0–1.2% a year over the forecast period.
For SMEs this means:
No recession in the baseline forecast.
But no “boom” either. Growth is steady, not spectacular, so businesses cannot rely on a rising tide to lift all boats.
Inflation and interest rates: pressure easing, but not gone
CPI inflation, which climbed above 11 percent in late 2022, has eased to 3.6 percent as of October 2025, down slightly from 3.8 percent the previous month. The OBR expects inflation to average around 3.5 percent in 2025, fall toward 2.5 percent in 2026, and only reach the Bank of England’s 2 percent target in 2027.
The Budget also includes policy measures expected to shave roughly 0.4 percentage points off CPI inflation in 2026–27, the largest inflation-reducing effect the OBR has ever attributed to a single fiscal event outside of a crisis.
What this means for SMEs:
Input costs may stabilise from here, particularly energy and fuel, but prices are not returning to pre-2020 levels. The baseline on which businesses operate is now structurally higher.
Although the Bank Rate has been cut several times this Parliament, and further reductions are expected as inflation cools, SME borrowing costs are not falling in parallel. As we explain in our article High-Street Banks Are Boosting SME Lending – But It Still Isn’t Getting Cheaper, banks continue widening margins, tightening criteria, and pricing SME risk independently of the Bank Rate.
In short: inflation may be easing, but the cost of capital for SMEs is not.
Labour market: softer demand, still tight in places
Unemployment has risen to around 5.0%, with youth unemployment above 15%.
Vacancies are falling and hiring has cooled, although real wages are now growing again.
Implications:
Recruitment may get slightly easier and wage growth a little more manageable.
However, skills shortages and sector-specific gaps will remain, especially in technical and service roles.
The big structural challenge: productivity and under-investment
Budget 2025 is blunt on one point: the UK has a productivity problem that has dragged on living standards for 15 years.
Pre-Global Financial Crisis (GFC), productivity growth averaged around 2% a year. Since 2010 it has averaged about 0.6%.
The OBR has now downgraded medium-term productivity growth to about 1.0% a year by the end of the forecast period.
HM Treasury estimates that if pre-GFC productivity trends had continued, GDP per head could be about £15,000 higher today.
The causes named in the document will be familiar to many business owners:
Long-term under-investment in both public and private capital
A series of shocks: GFC, Brexit, COVID-19, energy price spikes, trade disruption
What the government says it is doing
Budget 2025 leans hard on three pillars:
Stability
Tougher fiscal rules and one main Budget per year.
Larger “buffer” under the debt rules: £21.7 billion of headroom against the stability rule and £24.4 billion against the debt rule in 2029–30.
Investment
Protection of more than £120 billion of additional departmental capital spending compared with previous plans.
A £153 billion capacity envelope for public financial institutions, including the National Wealth Fund, which has already deployed £3.8 billion and aims to crowd in over £70 billion of private investment.
Reform
Planning reform to speed up development.
An Infrastructure Strategy and Industrial Strategy aimed at high-growth sectors.
For SMEs this is a double signal:
The state will remain fiscally tight and tax-raising overall,
but there will be meaningful pools of capital and policy support in targeted areas such as infrastructure, green energy, advanced manufacturing and digital.
Fiscal stance: less borrowing, higher taxes on “wealth” and assets
The fiscal story underpinning the Budget is clear: the UK has high debt and high borrowing costs, and the government wants to bring borrowing down steadily.
Public sector net borrowing is expected to fall from 4.5% of GDP in 2025-26 to 1.9% in 2030-31.
Debt interest costs are running above £100 billion a year, about £1 in every £10 of public spending.
UK borrowing costs are now the highest in the G7, which makes large deficits more painful to sustain.
To achieve this consolidation while still protecting capital investment, Budget 2025 leans on the tax side as well as spending controls. Key themes include:
Strengthening the tax base on assets:
Higher taxes on property, dividends and savings income to narrow the gap between tax on work and tax on wealth.
A new High Value Council Tax Surcharge for expensive residential properties.
Preparing for the shift to electric vehicles:
Introduction of an eVED mechanism to replace eroding fuel duty over time.
Tightening reliefs and welfare:
Reform of salary sacrifice for pensions.
Welfare and fraud-reduction measures projected to save several billion per year by 2030–31.
For SMEs, the direction of travel is clear:
The Treasury will be more aggressive in taxing static wealth and asset returns.
There is less space left for generous relief structures, especially if they are perceived as regressive or open to abuse.
Compliance, reporting and digital tax administration will continue to tighten.
Where are the opportunities for SMEs in this outlook?
Despite the headwinds, there are very real advantages for SMEs that move early and align with the direction of travel.
Cheaper money over time, if you are prepared
As inflation comes back toward target, the Bank of England is expected to lower rates further. Markets already anticipate cuts into 2026 as inflation drops from the current 3.6% level toward 2%.
Opportunity:
Refinancing: SMEs with legacy, high-rate debt should actively plan refinancing windows over the next 12–24 months.
Investment timing: Businesses that lock in funding lines ahead of stronger competition for credit will be better placed to capture demand when growth strengthens.
Public investment and the National Wealth Fund
Large increases in capital budgets and the ramp-up of the National Wealth Fund will create:
More procurement opportunities in infrastructure, energy, transport, digital and green transition projects.
Greater appetite for co-investment or matched-funding in strategic sectors.
Opportunity:
Position your business as a delivery partner or supplier in these government-backed programmes.
If you operate in green technology, construction, advanced manufacturing, logistics or digital services, align your propositions with stated policy priorities (net zero, resilience, productivity).
Productivity as a service
Because the UK’s core problem is productivity, any SME that can help other firms do more with less is in a structurally advantaged position:
Automation and software that reduce labour hours.
Outsourced services that improve quality and reduce overhead.
Supply chain optimisation, energy efficiency, logistics improvements.
Budget 2025’s narrative signals that government, lenders and investors will all favour business models that lift productivity rather than simply expand headcount.
Shifts in tax and regulation
The move to tax assets more heavily and tighten reliefs will create demand for:
Tax and structuring advice targeted at owner-managed businesses.
Finance products that smooth cashflow as tax burdens shift, especially where asset income is a bigger share of total income (e.g. landlords, investors, family businesses). This increasingly includes specialist Tax Funding options that allow businesses to spread HMRC liabilities and avoid draining working capital at critical moments.
Exit and succession planning, where the relative attractiveness of holding versus selling changes.
SMEs that combine financial insight with practical solutions, including project finance, invoice finance and structured lending to manage tax timing, will find a ready audience among clients caught by these shifts.
Practical steps SMEs can take today
To make things a little easier to digest and action, here is a checklist linked directly to the Budget 2025 outlook:
Stress-test your business against the fiscal path
Model your cashflow with higher effective taxes
Assume continued fiscal tightening and potential increases in tax on dividends, property and savings income.
Build scenarios for 1–3 percentage point changes in your overall effective tax rate.
Review borrowing terms and covenants
Map when your facilities refinance relative to the path of rates and inflation.
Consider locking in medium-term capital now if your balance sheet is strong.
For larger firms, assess exposure to public sector and regulated sectors
If you rely heavily on public contracts, understand how departmental capital budgets in your area are set to move and where constraints may bite.
Build a productivity plan inside your own business
Given productivity is now the central theme of the UK’s economic narrative:
Audit internal processes that still rely on manual tasks or duplicated effort.
Identify at least three digital or operational changes that could increase output per head over the next 12 months.
Tie investment decisions (software, equipment, training) to measurable productivity outcomes, not just “nice to have” upgrades.
Review your Cash Conversion Cycle, one of the most important but misunderstood productivity metrics. A tighter CCC frees up working capital, increases operational breathing room, and strengthens borrowing capacity. Our breakdown of What Is Your Cash Conversion Cycle? explains how to measure it and how businesses can shorten it to improve liquidity.
This not only improves margins but makes your business more attractive to lenders and investors, who are thinking in the same productivity terms as the OBR and HM Treasury.
Position yourself in the investment and procurement ecosystem
Track government programmes tied to the National Wealth Fund and major infrastructure spending.
Register on relevant procurement portals and frameworks.
Build partnerships and consortia if your business is too small to bid alone.
Even if you do not sell directly to government, many prime contractors will be looking for SME partners to deliver pieces of larger projects.
Talk to your advisers before the rules bite
Given the direction of tax policy:
Speak to your accountant or tax adviser about:
The impact of high value property surcharges.
Changes in treatment of dividends and savings income.
Salary sacrifice and pension planning implications.
For owner-managed businesses, revisit:
How you extract income from the company.
How you structure property, IP and other assets.
Succession, sale or partial exit plans.
Being proactive here can save many multiples of the advisory cost.
A disciplined macro path that rewards prepared SMEs
Budget 2025 does not offer a sugar-rush for growth. It is a consolidation Budget that accepts slower productivity growth, leans on tax rises, and commits to reducing borrowing and stabilising debt while protecting investment.
For SMEs, that environment:
Reduces the risk of a major macro shock driven by fiscal instability.
Creates clearer, more predictable rules of the game.
Rewards businesses that are productive, capital-efficient and aligned with high-investment sectors.
The winners over the next five years are likely to be SMEs that:
Use this period of modest growth and falling inflation to clean up their balance sheets.
Invest selectively in productivity-enhancing tools and people.
Position themselves to serve the areas where government and private capital will be most active.
