What Rachel Reeves’ sobering spring statement really means for growth

Growth, growth, growth! Chancellor Rachel Reeves seems to say that word every time she opens her mouth. Trouble is, it has been evaporating quicker than a summertime saucer of milk put out for the Downing Street cat.

She was at it again in her spring statement, aka the emergency budget. Bookies are going to be taking odds on how many times she says that word during her next big event in the autumn. Sadly for her, as was widely expected, the Office for Budgetary Responsibility (OBR) cut its 2025 growth forecast in two.

It had pencilled in 2 per cent for 2025. That is now down to a tepid 1 per cent. The decision brings the spending watchdog into line with other forecasters, such as the Bank of England (0.75 per cent down from 1.5 per cent) and the OECD (1.4 per cent down from 1.7 per cent).

However, the OBR’s forecast is the one that matters to the chancellor because it has the job of marking Reeves’ homework. Its downgrade, and the bond markets pushing Britain’s borrowing costs into the stratosphere, means the numbers weren’t adding up. Hence the swinging cuts in welfare spending.

The blame for this can at least partly be put at the door of No 11. The decision to plug the hole in the public finances by increasing taxes on jobs, otherwise known as employer national insurance contributions, throttled confidence. Businesses responded by mothballing investment plans and drawing up redundancy programmes.

“Weaker growth this year is a serious setback but not a surprise given the burden businesses are shouldering after the Budget,” snapped the CBI.

The truth hurts.

With the international backdrop uncertain, indeed scary with multiple flashpoints, not to mention Donald Trump threatening to impose more of his beloved tariffs on America’s friends and allies, there is a lot riding on Reeves plans to boost public investment and slash red tape.

“Protecting public capital spending is the right move to create the foundations for future growth but the government cannot deliver growth alone. Only the private sector can provide investment at the pace and scale we need to boost productivity, create jobs and improve living standards,” the CBI added.

In other words: it takes two to tango. And the government has work to do to get business to dance. Reeves stuck to its promise not to further increase firms’ taxes. But there is more to be done if confidence is to be restored and strained relationships repaired.

The chancellor made great play of the government’s planning reforms’ “getting Britain building again” and sweeping aside “blockers”. These include people on Heathrow flightpaths, whose worries about noise and pollution from the planned third runway are perfectly understandable.

Fine, if it works, from an economic standpoint. What troubles me is the availability of construction workers to do the bricklaying, carpentry and everything else that will be required from the building boom we are promised.

Much has been made of the potential that could be unlocked through getting people unfortunately tagged as “economically inactive” back into work. But many of the people the government says it want to “help” are either old, or ill or disabled. Even if its programmes are as successful as it hopes, they aren’t going to end up building sites.

"There is considerable uncertainty around whether the chancellor's measures will pay off, particularly as it rests on several behavioural assumptions. The changes to welfare are unlikely to incentivise work as much as the government states. The chancellor’s strategy is optimistic and at risk of potential benefits not panning out,” warned the National Institute for Economic & Social Research. That’s the nice way of putting it. It could easily have said that she’s living in cloud cuckoo land.

An already vibrant defence sector will get a boost from extra spending paid for by cutting the overseas aid budget and if the government can find the workers (I’m not going to mention immigration), there will be infrastructure projects and the housebuilding and what have you. Most forecasters still think this will help. The debate is over degree.

For its part, the OBR is optimistic (it is often more optimistic than other forecasters). It thinks that the British economy will get back on track towards the end of its longer term forecast. But let’s be honest: forecasts as far out as the end of the parliament aren’t much better than sticking a damp finger in the air to see which way the wind is blowing.

The OBR’s looks nice enough, but it isn’t anything I’d want to rely on. Dare I mention Europe? Boosting the UK’s trade by removing barriers would represent an easy win. Any number of businesses and business groups say the same thing. When you talk about the government’s mulish refusal to accept the compromises that would be required to secure this, business leaders have a tendency to roll their eyes and shake their heads.

While Reeves and co have done much which makes their party deeply uncomfortable, if not actively rebellious, they seem like frightened rabbits when it comes to what would be an easy, growth producing win.

This statement isn’t quite a case of the Chancellor hunkering down in the hopes it all comes good with the aid of handful of magic beans. But it isn’t far off.