Everything about British chancellor Rachel Reeves’ first budget was significant: the £40 billion (€47.8 billion) in tax rises, such as a big hike in employers’ national insurance, a £25.7 billion jump in health spending, the £100 billion rise in public investment over five years, the pathway to a record-high tax take of 38 per cent of the size of the economy. Everything, that is, except for the projected impact of such largesse on the underlying strength of the British economy.
The Labour Party won July’s election by promising to spur significant and sustained economic growth to finance “a decade of national renewal”. Instead, an independent analysis by the Office for Budget Responsibility (OBR) suggests Britain may only get a two-year sugar high by 2026.
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Anaemic growth caused by underinvestment has been a feature of Britain’s economy for close to 15 years. Reeves had hoped to seize the narrative by loosening borrowing rules to invest in rail, roads and housing. Yet the OBR analysis casts doubt on the potential payoff.
In March the OBR said growth this year would be just 0.8 per cent. Now it says it will be 1.1 per cent. Next year the projection rises from 1.9 to 2 per cent. After that the rate tapers off, as the tax raid planned by Reeves eats into demand: growth of 1.8 per cent in 2026 is down from a March projection of 2 per cent. Expansion by just 1.5 per cent in 2027 is also below a March projection of 1.8 per cent.
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The OBR party poopers predicted Labour would breach a central campaign pledge to achieve the highest growth in the G7 for two consecutive years by the end of the five-year parliament. Instead, it suggested Britain is on course to hit second spot by 2029 and would average third over the period.
Buried deep in the OBR’s latest 200-page economic and fiscal outlook is a table that suggests the outlook in the long run, from 2030 onwards, may be rosier for the British economy as Reeves’s investment finally starts to have an impact. By then it could be too late for Labour, politically, with a new election due in 2029 that it must win if it is to be in charge for the decade of renewal it promised.
This must be why Labour pulled the closest it had to a rabbit from a hat: an ongoing freeze in income tax thresholds will now end in 2028-29, which should give a boost to Britons’ pay packets just in time for the next election.
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