By Kel Nwanuforo
‘Growth’. It has been the straightforward, one-word mantra on the lips of the Prime Minister and Chancellor since before Labour entered government in July.
Yet so far, it has been notable mainly for its absence.
So what is the position now? Rachel Reeves presented the latest outlook from the official independent economic forecaster, the Office for Budget Responsibility (OBR), and it is fair to say that the news was mixed at best.
The headline: the 2.0% growth for 2025 that the OBR predicted at the time of the Autumn Budget has been halved to just 1.0%. The Chancellor put the deterioration down to “trading patterns becoming more unstable” – code for ‘Trump tariff chaos’ – and a global rise in government borrowing costs. However, Ms Reeves herself noted that she was “not satisfied with these numbers”.
More positively, the OBR did slightly upgrade their growth expectations for each year between 2026 and 2029. This makes for a very small improvement in their forecast for the overall size of the economy by the latter year compared to their thinking in October.
Still, leaving the 2022 ‘mini-Budget’ aside – which unravelled in shambles practically within hours – it is fair to say that the shine typically comes off most economic statements from Chancellors once journalists and economists start looking through the paperwork small print.
What was arguably notable about today’s Statement is that instead, the big, flashing sign that all is not going particularly well came from something Rachel Reeves said herself, and with no small degree of pride.
Labour’s growth policies – which include giving the green light to a third runway at Heathrow, culling government regulations and reforming planning to make it easier to build – would add 0.6% total to the size of the UK economy after ten years, she revealed, according to the OBR. Of course all extra growth is welcome, but this does not seem much about which to boast.
This is not to be unduly critical of the Chancellor, but rather a reflection of the very difficult position in which the UK finds itself economically. There are no easy answers.
The country is struggling with a number of issues which in many cases have built up over years and years. These include (take a breath) a dismal record on productivity growth, low levels of public and private investment, an ageing population, growing levels of worklessness due to illness, a more uncertain global trade and geopolitical environment, high prices in general and particularly for energy, big investments needed for defence and climate change, the high cost of housing, an unloved stock market, crumbling public services and a record-high tax burden.
Trying to address any one of these problems with an even bigger dollop of government spending would take time. In any event, trying to do so would take place against an backdrop still wrestling with elevated inflation and high borrowing costs. The Chancellor is also reluctant to relax her self-imposed fiscal rules, which are relatively stringent, given the UK briefly flirted with losing credibility in 2022. All of that means the government’s room for manoeuvre on spending more is very tight.
Frankly, there is no magic button marked ‘press here for growth’ available to any politician. Any turnaround is going to take a great deal of time and patience to achieve.
Away from growth, nor were changes to the OBR’s views on other matters any more favourable. Forecasts for unemployment, inflation and government borrowing costs were all revised upwards. Prices are now expected to rise at an average of 3.2% this year – on the rise again, having briefly fallen below the Bank of England’s 2.0% target in 2024.
Many readers will be pleased that, after the record rises seen in the Budget, the Statement contained no additional tax hikes. However, even here it is by no means ‘all clear’ from now onward.
Even after the cuts announced to the welfare budget, to the size of the civil service and to overseas aid, the Chancellor’s headroom against her fiscal rule of bringing non-investment spending back in line with tax revenues by 2029-30 remains quite narrow, at just £9.9bn.
For context, that is the same figure that the OBR found was the case in the October Budget – yet here we are just a few months down the line finding additional spending cuts to get back to that figure after a multi-billion-pound deterioration in the outlook.
The clear risk is that this could happen again. Another relatively small downshift in the growth outlook could see the Chancellor slipping against the rule again, sparking a fresh round of speculation about whether more tax rises might be forthcoming. Even if they are not – and Rachel Reeves sticks to more cuts to plug any future gaps – the speculation alone could be damaging to consumer and business confidence. We certainly saw that occur in the early months of the government’s term.
The difficulties facing the UK economy underscore the importance of maintaining worldwide diversification when managing a well-balanced investment portfolio. In today’s globalised world of technology and free capital markets, there is little need to maintain a ‘home bias’ anymore. While it is true to say that economies and stock markets do not always move in tandem, having the freedom to tilt investment allocations to areas where the corporate outlook seems brightest is a welcome flexibility.
The history of global stock markets shows us that, in many years, the capital growth on offer is often significant. Fingers crossed that the Chancellor can find some of the economic variety before her term is up.
