The new Office for Budget Responsibility (OBR) forecasts published today are the platform on which the government must build over the next few months. They were not great, but were by no means as bad as some had feared.
While recognising the significant uncertainties in doing any forecasting at this time of international turmoil, the OBR sees growth in 2025 of 1% and inflation at 3.2% (compared to 2% growth and 2.6% inflation in their October 2024 forecasts), but with better growth from 2027 to 2029 and stable 2% inflation as we approach the end of the parliament.
The GDP per head figures also look more glum, from a forecast of 1.4% in October to 0.3% now, although again these are set to recover well in succeeding years. This metric is particularly important for the government because it gets closer to how economic growth will actually feel to most people: overall GDP can grow by virtue of the population increasing, but that doesn’t mean the per head figure goes up accordingly.
The experience of the US Democrats last year showed that whatever is happening on growth, if people don’t notice and feel it, then you don’t get re-elected. As well as the GDP per head metric, another good proxy for this is real household disposable income per capita. Here, the government faces a mixed picture. Back in October the OBR said this would rise by 2.1% in 2025. This has been revised down to 1.1% for this year, though this is still healthy. Labour strategists will look more nervously at the figures for 2027 and 2028, when the figures fall to 0.2% and 0.3% respectively. This period – the run-up to the next election – is precisely when they will hope people feel the effects of economic growth most tangibly in their own lives and give the government credit for that.
Laying the groundwork for long-term growth
What these gloomier sets of figures all have in common is that they are about the short-term – which it is hard for the government to influence. Looking further ahead, there is more agency for policy decisions to make a real difference.
The government’s recent measures to boost growth – not least through reforms to get infrastructure, housing and other developments going – will be powerful, and Rachel Reeves seemed understandably pleased that the OBR acknowledged in its forecasts the positive impact of the changes in planning with respect to housing in particular. Throughout the Chancellor’s speech and the accompanying document, the government was at pains to herald that this is “the biggest positive growth impact that the OBR have ever reflected in their forecast, for a policy with no fiscal cost”.
It is also striking and welcome to see that when under fiscal pressure the government has not followed the example of some of its recent predecessors and cut back on capital investment. In fact, on top of the Autumn Budget’s commitment to some £100bn in extra capital investment over the forecast period, today saw a further £13bn announced.
The increase in defence spending, which is clearly needed for national security reasons, should also support the government’s economic growth mission if deployed sensibly. In that context it was good to hear the Chancellor talk about 10% of the Ministry of Defence (MoD) procurement budget being allocated for spending on novel technologies and new opportunities for tech firms and start-ups for UK defence innovation. FGF has previously argued for smart use of procurement policy in this way to support both scale-up businesses and wider innovation.
Short-term measures to steady the ship
Where the government can be more influential in the short-term is on the debt and deficit. Without any new measures since October, the OBR suggests that Rachel Reeves would have broken her own fiscal rules – specifically the “stability rule” which states that the current budget must move into balance over the course of the parliament. Whether that matters is a debatable point, especially given that markets are likely to understand how new global pressures drive the need to increase defence spending, and sharply.
But nevertheless Reeves did respond to that risk, and has brought herself back into line with the stability rule by proposing major changes to benefits, civil service running costs and sensible efforts to boost the capacity of HM Revenue and Customs (HMRC) to collect more tax.
Many will be nervous about the changes to welfare – especially as they come with a big ‘cuts’ figure attached. And clearly great care needs to be taken in the detail of the changes to make sure that those in genuine need on medical and incapacity grounds do not suffer. But it was evident that something needed to change if the government was to prevent the bill for health-related benefits from continuing to balloon and achieve its aim of getting far more people – including young people – into work.
All eyes on June for signals of ambition and the reform agenda
With luck the fiscal environment will now steady a little and allow the government to focus more on its five national missions. The multi-year Comprehensive Spending Review (CSR) scheduled for June has been a long time coming, but it is pivotal as it will set out the government’s stall for the next few vital years. It’s a big test as to how much this government genuinely wants to do things differently – by rigorously orienting the CSR around missions, as the Chief Secretary to the Treasury has suggested, and by following through on pre-election rhetoric about devolving more power and autonomy to strategic authorities – or whether it is just about progressive tweaks to the ‘business as usual’ of government over recent years. The latter, quite frankly, is unlikely to cut it.
The CSR will also be the moment when we get more clarity on this government’s approach to public services. Sadly – though perhaps inevitably – this Labour government was elected in 2024 when the public services were in dire straits and it now has to build them up again. But the public’s appetite for blaming it all on the last lot tends to sharply decline over time, and so the administration is going to need to set out answers of its own in short order. Alongside improvements in the cost of living, people’s sense of how public services are working for them – how easy it is to get a GP appointment, for instance – will also be critical to the government’s re-election prospects.
Spending is a vital part of that – especially on the NHS – but so too is reform. It was encouraging to see the government launch its new £3.25bn Transformation Fund, with the explicit aims of fundamentally reforming public services, seizing the opportunities of digital technology and AI and transforming frontline delivery. The first handful of allocations from the Transformation Fund were announced today, but there will be much more to come – and we at FGF are going to be giving more thought over the coming months to the principles of the public service reform agenda that such investments and initiatives should be in service of. As a minimum we need our public services to become more preventative, less siloed and more responsive to the people and places they exist to serve.
Today largely confirmed what we already knew: that given both its inheritance last year and the dramatic geopolitical events that have taken place since, this government is up against it on multiple fronts. There is a strong case for going hard early on in a term of office and doing difficult things to get the finances under control, with the hope that this, combined with strategic investment and an ambitious reform agenda – and external ‘events’ that help rather than hinder the cause – will allow for better news nearer the next election. Indeed commentators like David Smith at the Times think there are already some signs of life in the economy starting to come through. Nevertheless with the world uncertain and the fiscal headroom pretty tight, there will be a lot of crossed fingers in the Treasury and No 10 today.
