There are no quick fixes, the Chancellor told MPs on Wednesday afternoon as she built up to the peroration of her spring statement. And in that assessment, she was quite right. Since the financial crisis that almost broke Britain’s banking system and sent the economy into a deep recession more than a decade and a half ago, a succession of chancellors have come to the Commons dispatch box to lay out their plans for healing Britain’s myriad economic ills.
From Labour’s Alistair Darling, his Tory successor George Osborne, through Philip Hammond, Rishi Sunak and, very briefly, Kwasi Kwarteng, to Jeremy Hunt and now back to Labour with Rachel Reeves, their combined efforts have failed to find a cure. They all, in their different ways, talked a good game, their words polished and spun by a phalanx of smart speech writers and political advisers. You could almost believe that things really were getting better when they sat down. But the cold hard truth is, they never were, and they are still not.
The forecast for GDP growth this year has now been slashed in half from an always optimistic two per cent at the time of the October Budget, to just one per cent. Even the slightly upgraded forecasts from the Office for Budget Responsibility (OBR) for the rest of the decade — 1.9 per cent next year, 1.8 per cent in 2027, 1.7 per cent in 2028 and 1.8 per cent in 2029 — leaves GDP crawling along at less than the two per cent that was once regarded as just about acceptable, but far from exciting, growth.
Strip out the Covid bounce-back years of 2021 and 2022, and the UK has not moved forward at a two per cent pace since as long ago as 2017 when output advanced at what now seems a giddying rate of 2.7 per cent.
Chip away at the glossy veneer applied by the Chancellor on Wednesday and the sobering underlying reality of Britain’s economic position is revealed in the more measured, and gloomy, language in the OBR’s Economic and Fiscal Outlook document.
It talks of prospects becoming “more challenging since the Autumn Budget” with stagnating output and lower consumer confidence. Labour’s long overdue planning reforms trumpeted by the Chancellor, though welcome, will only deliver a “modest boost” to output at best. The underlying reality is that the OBR’s forecast for cumulative growth between 2023 and 2029 is still half a percentage point lower than projected only six months ago in October, while the level of productivity is more than one per cent worse.
More pain to come
How could things have got so much worse so quickly over the winter months? The OBR estimates that around two thirds of the deterioration is down to external factors: higher energy prices, slower than expected falls in interest rates and what it rather euphemistically refers to as “elevated uncertainty”. The other third is explained by Britain’s dismal and worse than expected productivity performance.
All this is before the calendar turns over from March to April, a month dreaded by employers, entrepreneurs and consumers up and down the land because of the barrage of extra costs coming their way, from the National Insurance hikes to higher water and energy bills. Add to that the so called “stealth tax” of frozen thresholds and it is no surprise that taxes as a percentage of GDP are set to rise from 35.3 per cent now to a record high of 37.7 per cent in two years’ time.
Hurtling down the track next month is Donald Trump’s so called April 2 “Liberation Day” reveal on the retaliatory tariffs he will unleash on countries that displease him
The other “known” hurtling down the track next month is Donald Trump’s so called April 2 “Liberation Day” reveal on the retaliatory tariffs he will unleash on countries that displease him. The UK is not directly in the firing line, yet, but it cannot hope to entirely avoid collateral damage. In the worst case scenario of an all-out, full-scale global trade war, Britain’s GDP growth would be reduced by a full percentage point in 2026-27.
Hopefully it will not come to that, but even if the tariffs are limited to China, Canada and Mexico the UK’s GDP growth will be trimmed by 0.2 per cent that year. That is growth this country can ill afford to lose.
In words that, strangely, you will not have heard in the Chancellor’s speech, the OBR concludes that “the long-term fiscal outlook remains very challenging, with pressures from an ageing population, climate change and rising geopolitical tensions putting the public finances on an increasingly unsustainable path”.
That inevitably means that Wednesday’s spring statement will come to be judged by political historians as yet another can kicking exercise by a chancellor trying to buy time.
But, without a growth miracle over the next few years, that reckoning cannot be put off forever. There is no shame in admitting that a trio of unforeseen geopolitical “black swan” events — the financial crisis, the pandemic and the cost of living crisis triggered by the Ukraine war — plus a fourth self-inflicted wound in the form of Brexit, have laid waste to the nation’s finances and saddled it with levels of debt not seen since the early 1960s. A fifth is probably coming heading our way in the form of the Trump trade wars. Lay on top the longer term meta trends flagged by the OBR, such as the ageing populations and the threat from Russia, and it is perhaps no surprise chancellors keep having to come back to the dispatch box to dole out more unpleasant quack medicine packaged up as a magical cure.
Reeves’s job on the line?
Fortunately, the UK can boast some genuine world class economic advantages, ranging from some of the most admired universities, to a historically unparalleled record for innovation and creativity, to, of course London, the city that dare not speak its name in government circles.
Also, official unemployment remains low, although the fact that around a fifth of the working population remains economically “inactive” for a variety of reasons shows the true underlying level of joblessness is far higher.
Rachel Reeves tried to make the best of a bad hand on Wednesday and will live to fight on for now
Sooner or later a chancellor is going to have to deliver a Budget that speaks honestly and unflinchingly to the long-term problems facing the UK while also delivering an inspiring message that can unleash those dormant animal spirits that once made the country a global economic powerhouse. It is a big ask. Rachel Reeves tried to make the best of a bad hand on Wednesday and will live to fight on for now. But if the outlook continues to deteriorate over the following six months up to her next “fiscal event” in the autumn at the same rapid pace seen since the 2024 October Budget, then her job security will surely come into doubt.
The May 1 council elections and Runcorn and Helsby parliamentary by-election are almost certain to deliver a damning verdict on Labour’s performance so far. There will have to be a sacrifice, a gesture that says, “Yes, we’re listening”. A major Cabinet reshuffle is probably inevitable. Sir Keir Starmer will be hugely reluctant to jettison his chancellor, with whom there are no obvious policy disagreements. But unless things start to pick up dramatically, soon he may have little choice.
