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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Rachel Reeves stands accused of lacking a theory of growth. Popularised by political scientist Ben Ansell, the critique rebukes the UK chancellor for banging on about economic growth while being “empty-minded” about its pursuit. This is all rather unfair. If you spend any time with Treasury officials or listen to Reeves herself, you will know she has a strategy and it rests on three pillars: stability, investment and reform.
A fairer criticism is that she was inadequately curious or prepared for the scale of economic shocks she would face in government. This weakness led her to rule out the most efficient tools of taxation and then impose more damaging tax rises after insisting she had no plans to do so.
Next week’s Spring Statement will set the stage for Reeves to demonstrate her economic theories in light of a new economic landscape. Just as the Office for Budget Responsibility’s October forecasts highlighted the weakness of the UK public finances after Labour addressed immediate public spending challenges, the forecasts accompanying Reeves’ statement will bring their own miseries.
The headline growth figure for 2025 will be cut drastically. This is certain and reflects maths, not leaks from sources close to the chancellor. The economic weakness at the end of 2024 and the start of this year ensures the OBR has to downgrade the 2025 growth figure from 2 per cent to 1.3 per cent even if it keeps its view of the rest of 2025 unchanged. It is more likely to halve it to around 1 per cent.
Slashing growth “forecasts” might be the political headline next Wednesday, but it is not important in the overall OBR forecast. Unless it has evidence to the contrary, the fiscal watchdog assumes any bad news will be temporary and reversed in future. So it is likely to raise its growth outlook later in the parliament to offset unexpected weakness at the end of 2024.
The main difficult change in the forecast will be higher-than-expected interest rates, increasing the cost of government debt servicing by around £10bn a year, or 0.3 per cent of GDP. That is sufficient to wipe out the headroom Reeves had in October against her main fiscal rule of balancing day-to-day public spending with taxation by 2029-30.
The third crucial element of the OBR’s likely forecast is that it will not undertake a full assessment of the probable potential growth rate of the UK until the Autumn Budget, despite horrible recent productivity figures.
If the shape of the forecast is little changed apart from a near-term growth downgrade and higher interest costs, what will the chancellor do? This is where an understanding of her stability, investment and reform strategy helps.
Stability means there will be no rewriting or fiddling of the fiscal rules. There won’t be a special purpose vehicle for extra defence spending and the Treasury recognises the UK does not have Germany’s healthy public finances and cannot simply borrow more to address the challenges of the new world we live in. Anything of this sort would destroy Reeves’ credibility.
Labour’s focus on investment means the government will also protect its planned capital spending programme even though higher borrowing costs make it more expensive.
Reform is evident in plans to reshape planning, disability benefits, regulatory burdens and the supply of long-term “patient” capital for infrastructure. The OBR would be unwise to score these as growth-enhancing yet, since they are far from fully formed and will work only over time.
Instead, Reeves will balance the books with the cuts to welfare announced in parliament on Tuesday along with slightly lower departmental spending over the rest of the parliament than previously planned. The Treasury’s aim here is to be boring.
Steering a steady ship in choppy waters is a fine strategy for now, but it will struggle to survive the rest of 2025. The UK economy will be buffeted by President Donald Trump’s trade restrictions, which raise uncertainty and hit growth potential. The departmental spending plans, as currently set out for later in the decade, are unlikely to be sufficient to satisfy public demands.
The government’s commitment to raise defence spending to 2.5 per cent of GDP by 2027 already looks inadequate to secure British or European security. And the OBR cannot indefinitely postpone taking a less optimistic view on longer-term UK productivity growth. That would undermine its public finance forecast. All this is happening as the UK population ages and demands more from government.
Reeves might get lucky, but at the moment, the Spring Statement appears likely to be a moment of calm in a turbulent year.
