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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Closing her Spring Statement, Rachel Reeves was bold, placing it in the context of a world changing before our eyes. The government was “not retreating from challenges; not stepping back”, the chancellor said. Instead it demonstrated, “the courage to step up, to secure Britain’s future and to seize the opportunities that are out there before us”.
This reminds me of the March 2020 Budget when Rishi Sunak stood at the despatch box as the pandemic lapped at our shores. He told the public that Boris Johnson’s government would “rise to this challenge”, delivering “security today” and “prosperity tomorrow”.
Back then, the independent fiscal watchdog, the Office for Budget Responsibility, had not had time to include Covid effects in its forecasts. Five year on, it is instructive to see how reality differed from expectations in early 2020 for the first half of the decade. The results are bleak.
Many countries would find a comparison of outcomes against pre-pandemic expectations brutal, but the UK’s is particularly dire. Billed as a cautious growth prediction, between 2019 and 2024 we looked forward to 7.3 per cent cumulative growth; the result has been 3.4 per cent.
Russia’s invasion of Ukraine and the resulting energy crisis and inflation shock left prices 24 per cent higher in 2024 than in 2019, compared with a forecast of 10 per cent cumulative inflation. And despite economic weakness, interest rates are much higher, leaving the net cost of servicing government debt in 2024-25 at £81.3bn against the OBR’s 2020 expectation of £28.5bn.
Excluding debt service, the UK’s primary deficit in 2024-25 is set to be 1.9 per cent of GDP — almost double expectations. And that leaves out the biggest change: including the higher cost of borrowing, the current budget deficit is set to be 2.1 per cent of GDP in 2024-25, compared with an expectation of a 0.8 per cent surplus back in 2020.
Public spending and taxes are higher than projected without public services being better. Public investment, however, is lower than expected. We can safely say therefore that the UK’s economic record in the first half of the 2020s has been miserable. Weak growth, stagnant living standards, higher taxes, lower satisfaction in public services, lower public investment and more spending on servicing public debt.
Fast forward to this week’s forecasts: the OBR sees no prospect of recovery in the second half of this decade. This gloomy outlook applies even without taking into account grim new features on the economic landscape, the world sliding into trade wars and US disdain for Europe’s security.
In fact, the OBR’s predictions are remarkably similar to those disastrously over-optimistic ones of March 2020. Although the fiscal watchdog has revised down economic prospects for the second half of this decade, it still thinks the economy will grow 8.5 per cent between 2024 and 2029. Just as in 2020, it expects the current budget to be broadly in balance within three years and government debt to be falling modestly within five. With the world again in flux, the UK is only just managing to maintain public finances that broadly meet simple rules of thumb to show they are sustainable.
Despite highlighting the benefits of getting Britain building again, Reeves’ public investment plans are significantly lower than those announced by Sunak five years ago. If the current forecasts prove correct, they would represent a better five years than we have just experienced. Yet it is extremely difficult to see them as a prediction of this decade’s most likely outcome.
The OBR’s growth forecasts are more optimistic than every single one of the external economists it consults. It has not included any effect from global tariffs nor of possible retaliation dampening economic prospects. And government has made no allowance for the chance that defence spending will need to rise far higher than the promised 2.5 per cent of GDP.
Reeves was correct to note that planned spending growth on public services of 1.2 per cent annually in real terms was significantly greater than under the Conservatives, but without tangible improvements that will not matter much politically. The increase is nothing like that which improved outcomes so rapidly under Labour between 1997 and 2007.
Of course, the UK might get lucky. Forecasts are forecasts; we have seen how wrong those from 2020 were. In the near term, the most likely windfall would come from households saving less and spending more. Given significant growth in real incomes, the unwillingness of British consumers to shop is most unusual.
The US tariff threat might be more bark than bite. Interest rates and energy prices could fall. Both would be an unexpected bonus. The government could also make its own luck by reversing this decade’s deterioration in public sector productivity. If there is good news on the public finances in the months and years ahead, we should expect the chancellor to spend any headroom she gains.
But history tells us not to expect any such windfall. And to worry that the OBR has, again, been persuaded to be too optimistic at a time of global turmoil. But even if its forecasts are spot on, the British economy in the 2020s will merely see an improvement from miserable to mediocre.
