The Chancellor of the Exchequer, Rachel Reeves, frequently reminds us that the government’s key economic mission is to secure economic growth. In pursuit of this goal, her speech a fortnight ago (29 January) aimed to set out the government’s plan for achieving stronger growth. The speech contained a lot of detailed policy commitments – particularly in relation to specific transport infrastructure projects. But the key question is how far these plans will change the dials influencing UK growth performance.

UK Post-War Economic Growth

The backdrop to the Chancellor’s speech is disappointing UK economic growth – both over the past couple of years and for most of the 21st century. After the Second World War, UK GDP rose at an impressive annual rate of 3.2 percent in the third quarter of the 20th century (1950-1974). The UK shared in a more general post-war surge in economic activity in western economies, in Europe, North America and other market-oriented economies around the world.

After the oil price shocks of the 1970s, UK economic growth resumed at a respectable pace – helped by economic reforms, new technologies and liberalisation of trade/finance. In the 25 years 1983-2007, UK economic growth averaged 2.8 percent. Again, the UK was part of a more general positive upswing in other major economies over the same period – 3.4 percent annual GDP growth in the US, 2.4 percent in Japan and 2.3 and 2.1 percent respectively in France and Germany. The UK was the third best performing economy in the G7 in this second 25-year phase of post-war economic growth – behind the US and Canada, but ahead of Japan and the other three major European economies.

Since the 2008-9 global financial crisis, there has been a significant ratcheting down of growth rates in the UK and other major western economies. In the fifteen years 2010 to 2024, UK GDP rose on average by 1.5 percent a year. This is around half the rate of growth the UK experienced in the two previous long phases of post-war economic growth. However, the UK kept its third place in the G7 growth league over this period, ahead of France (1.2 per cent), Germany (1.3 per cent), Italy (0.5 per cent) and Japan (0.9 per cent) but still behind the US (2.4 per cent) and Canada (1.9 per cent) – highlighting the fact that weaker growth 2010-24 was a general issue affecting major industrialised economies, not just a UK-specific problem.

Perhaps more worrying for the current Chancellor, however, is the very recent growth performance of the UK economy. In the two years since autumn 2022, monthly GDP figures show UK growth averaging less than 0.5 percent a year. The UK economy is struggling to grow at all at present and monthly GDP has flat-lined since the late spring – dropping very slightly in the past 6 months. This downbeat tone on growth was reinforced last week by the Bank of England’s sharp revision down in its 2025 growth forecast from 1.5 per cent to 0.75 per cent.

The Impact of the Budget

A further cause for concern about short-term growth prospects is the impact of the October Budget. At first sight, the Budget might look positive for growth, through its impact on the level of public spending and borrowing. Total government spending in cash terms is now projected by the OBR to be over £83bn higher in 2025/26 than before the Budget and borrowing is forecast to be £40bn higher. But this higher level of spending and borrowing is at risk of leading to rising costs and prices, instead of higher national output.

This inflationary risk has been aggravated by the rise in employers’ National Insurance and a significant increase in the minimum wage, which will both kick in from April. The 6.7 percent rise in the National Living Wage follows two previous annual increases of nearly 10 percent in 2023 and 2024 – leading to a cumulative rise of nearly 30 percent in just over two years from March 2023 to April 2025.

In addition, wage increases and indicators of underlying inflation are already running at an uncomfortably high level. The latest figure for annual wage growth is 5.6 per cent for the economy as a whole and 6 per cent in the private sector – well ahead of forecasts for end-2024 a year ago (around 4 percent). Meanwhile, services inflation remains stubbornly high at 4.4 per cent and “core” inflation, excluding food and energy prices, is still running at above 3 percent.

This high background level of inflationary pressures – plus the impact of the Budget and minimum wage rises on costs and prices – will prevent higher public spending and borrowing translating into stronger economic growth, even in the short-term. The boost to public investment and extra spending on public services will be offset by weak business confidence and a post-Budget squeeze on private sector investment.

The Chancellor’s “Plan for Growth”

The Chancellor’s “plan for growth” therefore faces significant headwinds – a declining trend growth rate, persistent inflationary pressures and the negative impact of the autumn 2024 Budget. The IMF’s latest forecasts suggest that UK growth will continue at around 1.5 percent on average until the end of the 2020s, roughly in line with the trend we have experienced since 2010. The latest NIESR forecast is in the same ballpark, projecting average UK GDP growth of 1.6 percent in the five years 2025-29. But recent GDP figures and the Bank of England’s recent gloomy forecasts (with growth projected to average just 1¼ per cent 2025-27) suggest growth could be even weaker than this in the second half of the 2020s.
In her speech last week, however, the Chancellor challenged the idea that we should accept a lower growth rate in the future – asserting that “lower growth is not our destiny”. The Chancellor’s agenda to reverse the tide of falling economic growth has three elements: promoting trade; supporting economic reform; and encouraging investment.

On the first two of these items – trade and reform – there was little that was new in the speech. She talked of the need to forge better trade relations with the US and EU as well as the emerging superpowers of China and India. But translating this into concrete actions will be a long and slow process. The EU is averse to reopening substantial elements of our Brexit trade deal and there are well known difficulties associated with a substantial trade agreement with the US, which is currently imposing new tariff restrictions. China and India will have a long list of concessions which they will be looking for in any future negotiations with the UK – so concluding a future trade agreement will be very difficult.

Economic reforms were not discussed in any detail by the Chancellor in her speech. There was a brief mention of the need for welfare reform, but no discussion of tax reform or any proposals to address declining productivity in public services. Planning reforms were the main area where the Chancellor was signalling action, but this is not the first government to do so – it was a big theme under Tony Blair and Gordon Brown as well as for the Conservatives from 2010 until 2024. Yet despite many speeches and official reports under previous governments, planning issues still remain a major source of delay to major business developments and transport schemes.

The area where the Chancellor provided most detail on her plan was in terms of the government’s role in delivering and supporting major investment projects. Housing, transport and clean energy are to be the main areas of emphasis. On the transport front, commitments to support airport expansion at Heathrow – and possibly Gatwick and Luton too – were headline-grabbing statements. But it is worth recalling that the UK government first backed a Heathrow third runway in 2003, over 20 years ago. In the meantime, the airlines at Heathrow are losing enthusiasm for the project due to its escalating cost which will feed through into significantly higher airport charges.

Similar observations can be made about other major transport projects which featured in Rachel Reeves’s speech – such as the Lower Thames Crossing and road/rail links in the Oxford-Cambridge corridor. These are also projects that have been under discussion for decades, but progress in moving to actual construction has been painfully slow.

The Chancellor’s commitment to advance these major projects is of course welcome. But the full growth benefits of improved transport infrastructure will only come through when the road/rail links or airport facilities are properly constructed and completed. Based on the UK’s recent track record of transport infrastructure delivery, that is not likely to be until the late 2030s or the 2040s.

Economic Growth: Shifting the Dials?

The Chancellor subtitled her speech as moving “further and faster” to deliver higher economic growth. That is clearly the intention of this government, but much more needs to be done to realise that vision. Progress in reaching agreement with our major economic partners will be slow and difficult, and US tariffs are a major setback to the process of trade liberalisation world-wide. The government needs to put much more flesh on the bones of its ideas on economic reform, and develop substantial proposals in difficult areas like welfare reform and improving public service efficiency and productivity. Finally, developing major infrastructure projects has been a slow and tortuous process in the UK in the past and that is likely to remain the case.

For all these reasons, the growth dial for the UK economy is likely to be stuck at an annual rate of 1.5 percent or so for the foreseeable future, or even lower. Inching this up even a bit closer to 2 percent in her Chancellorship would be a great achievement for Rachel Reeves, but is far from guaranteed under current policies.