Budget 2026 and the labour market: five things to watch
The labour market appears to be stabilising but has yet to move into sustained recovery. While there are some positive signs, vacancies continue to fall, hiring remains subdued and the impacts are uneven. With fiscal headroom remaining tight, the Chancellor has limited room for major new spending. The Budget is more likely to signal direction than deliver reform, with the Milburn and Timms reviews still to come.
Here are five things we’ll be watching.
1 Will the Budget set a more ambitious vision for youth employment?
With a million young people NEET, the Government urgently needs to set out an investment-backed plan for youth employment. More than a quarter of unemployed 18 to 24-year-olds are estimated to have been out of work for over a year. We’ve seen a series of welcome announcements on the Youth Guarantee over the last year and most recently the expansion of local apprenticeship services. Big reforms are likely to wait for the Milburn review, expected after the Budget, but youth employment is likely to be a major focus. The key question is whether the Chancellor uses the Budget to signal a more ambitious long-term strategy on youth employment and skills.
2 Will it reduce the cost of hiring?
Hiring remains weak compared to pre-pandemic. Payroll inflows in the year to August were 13.5% below the same period in 2019, and vacancies dropped below 700,000 for the first time since early 2021. Vacancies in firms with fewer than 10 employees are at a 13-year low outside the pandemic, as costs rise and demand remains weak. Young people have been hit hardest by weak employer demand and those with little work experience and long spells out of work face the toughest competition.
Reports suggest the Chancellor will include measures to reduce the cost of hiring younger workers. The Government has already softened its approach to equalising the youth and adult minimum wage rates, with increases of 3.9% expected for both. Targeted subsidies are likely to be the more cost-effective way to boost youth hiring than blanket National Insurance reductions. Our evidence also suggests that they work best as part of a wider package to improve pathways into work and support employers to recruit and retain young people.
3 How far will the Budget go on devolution?
The Chancellor is expected to set out a roadmap for fiscal devolution, including giving strategic authorities a share of locally generated tax revenues. This would mark a significant step in giving local leaders greater influence over economic development. For the labour market, the key question is whether greater fiscal powers are matched by further devolution of employment and skills, enabling local leaders to develop more integrated and locally tailored approaches to helping people into work. This would be consistent with the Government’s broader vision for ‘devolution by default’ but the challenge will be ensuring that greater responsibilities are matched by sufficient powers, funding and capacity to deliver meaningful change. Greater devolution will also raise questions about the role of national services and how consistent access to support can be maintained in areas that remain outside devolved arrangements.
4 Will skills policy keep pace with AI investment?
We’ve seen relatively little on skills in recent Budgets. This one is expected to include a package of AI-related investments aimed at strengthening cyber security, supporting UK AI companies and helping businesses adopt AI. But will investment in skills keep pace? AI could boost productivity, but gains depend on effective adoption, job redesign and investment in training – not simply acquiring new tools. Workers will need both confidence using AI tools and strong employment skills such as problem-solving, critical thinking and adaptability. As entry-level roles evolve, maintaining routes into work and opportunities to learn on the job will also be important. The key challenge for policy is ensuring that public and employer investment enables both young people and existing workers to develop the skills needed to adapt.
5 What next on welfare reform?
Major welfare reforms are unlikely to feature in the Budget itself, with the Milburn and Timms reviews expected later in the autumn. The Budget may nevertheless provide clues about the Government’s direction of travel on employment support and disability benefits ahead of those reviews. Those reforms need to prioritise investment in effective employment support alongside any reforms to the benefits system. Our evidence shows that long-term savings are more likely to be achieved by helping people overcome barriers to work and move into sustainable employment than through reforms that simply shift costs elsewhere in the system. Employment outcomes improve when support is personalised and tailored to individual needs, with conditionality acting as a backstop rather than the primary mechanism for helping people into work.
The Budget won’t necessarily provide answers to these questions, but it may provide important signals on the direction of travel on labour market policy. Beyond specific policy announcements, an important test will be whether the Budget sets out a coherent strategy linking growth, employment and devolution.
Any views expressed are those of the author and not necessarily those of the Institute as a whole.