Britain’s unemployment rate is forecast to climb this year to its highest level since the pandemic, the Office for Budget Responsibility (OBR) has said.

The OBR said the number of people out of work who were looking for a job would hit 1.9 million by the end of the year, 400,000 more than when Labour came to power.

The budget watchdog added that this would push the unemployment rate to 5.3 per cent, its highest level since the latter months of 2020, when Covid had plunged the nation into lockdown.

Bosses have complained that Labour’s pro-union employment laws, the rising minimum wage and soaring taxes are making it difficult to hire new staff.

The changes have particularly hurt young workers, with the Government being accused of pricing a generation out of the jobs market.

Official figures show the unemployment rate hit 5.2 per cent at the end of last year, already above the OBR’s November forecast of 4.9 per cent for the final quarter of 2025. Youth unemployment stands at 16.1 per cent, its highest level in more than a decade.

Meanwhile, Rachel Reeves admitted in her Spring Statement on Tuesday that the economy would grow at a slower pace this year than previously thought.

In worrying news for the health of the economy, the Chancellor told MPs that GDP would expand by just 1.1 per cent in 2026, according to the OBR.

This is lower than its previous estimate for growth of 1.4 per cent, thanks to lower migration.

Business chiefs criticised the Chancellor for failing to introduce support for employers at a time when they faced further cost increases amid the war in Iran.

Tina McKenzie, of the Federation of Small Businesses (FSB), said: “The downgrading of the growth forecast for this year will be no surprise to small businesses, where cost burdens have already started reducing growth plans, cashflow and job creation in our local communities.

“Given the heightened global tensions of recent days, if there is another energy price crisis, the Government must stand ready to bring forward a package of help for small business energy consumers, akin to during the last huge price spike.”

Shevaun Haviland, director general of the British Chambers of Commerce, added: “The immediate priorities must be accelerating long overdue business rates reform and making sure changes to employment rights don’t add unnecessary costs.”

The growth downgrade threatens to undermine Sir Keir Starmer’s 2024 election pledge that Britain would have the fastest growth in the G7.

The Chancellor has adjusted her language around the promise in recent weeks, instead stating that the UK has the fastest growth of any European G7 nation.

Ms Reeves told MPs that growth would bounce back towards the end of the decade.

Average growth across the forecast period is largely unchanged, growing by 1.6 per cent in 2027 and 2028, and 1.5 per cent in 2029 and 2030.

In some positive news, Ms Reeves said the OBR had upgraded its estimates of her Budget headroom from £21.7bn to £23.6bn.

However, the announcement was undermined by turmoil in financial markets, where the cost of short-term government borrowing has surged at the fastest pace since the aftermath of Donald Trump’s tariff onslaught last April.

Borrowing costs have been pushed higher by rising concerns over inflation, which have been fuelled by the soaring price of oil and gas this week over the Iran war.

Andrew Griffith, the shadow business secretary, accused Ms Reeves of “gaslighting” the public.

“More gaslighting than Victorian London,” he said. “The Chancellor is living in a fantasy world where unemployment isn’t rising and growth isn’t being downgraded.”

In her statement, Ms Reeves said the OBR had forecast that the Government was poised to reduce borrowing by almost £18bn more than predicted in the autumn.

The Chancellor told MPs that Britain was expected to borrow less than the G7 average, “something the Tories never achieved in 14 years”.

The Office for Budget Responsibility forecast shows that public sector net borrowing is set to fall from 4.3 per cent this year to 3.6 per cent next year, reaching 1.8 per cent by 2029-30.

Ms Reeves said: “I have never accepted that we have to choose between social justice and fiscal responsibility, because there is nothing progressive, nothing Labour, about spending over £100bn a year. That’s one [pound] in every £10 of public money on servicing debt racked up by the Tories.”

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