Today the economic agenda in the UK has been set by the National Institute for Economic and Social Research which has released this.
The Government is not on track to meet its ‘stability rule’, with our forecast suggesting a current deficit of £41.2 billion in the fiscal year 2029-30. Substantial adjustments in the Autumn Budget will be needed if the Chancellor is to remain compliant with her fiscal rules.
We have been expecting tax rises in the Autumn Budget but some had been living in a type of fantasy land where tax rises will not be needed. From the point of view of the Chancellor herself this is rather awkward as of course she came into power blaming the previous government for creating a “Black Hole” in the UK public finances and now we see that she has in a year apparently created two of them.
Under present estimates, it said, Reeves would need to find £41.2 billion to cover the costs of weaker economic forecasts and tax reversals, plus a further £9.9 billion, if she was to have the same headroom as she had at the time of her last financial statement in March. ( The Times)
According to the NIESR things have got worse on pretty much all fronts since the Spring Statement.
It found that total government expenditure was £14.3 billion higher than in the spring. The government’s failure to pass its welfare reforms and its U-turn over winter fuel payments further increased spending by £15.2 billion. ( The Times)
Also looking into the actual numbers means that the NIESR has stumbled upon the First Rule of OBR Club ( that it is always wrong).
It also said that weaker output and employment growth compared with the Office for Budget Responsibility’s (OBR) forecast in March implied lower tax revenue and higher welfare payments by 2028-29. ( The Times)
It is unlikely that they will press the issue because if you are at the NIESR a job at the OBR would be a dream. But there is another constant theme because if you look at the OBR numbers from back then they were also a reduction.
Against this more challenging and uncertain backdrop, we now expect real GDP growth of 1.0 per cent this year, half the rate in our October forecast, before it recovers to average around 1¾ per cent over the rest of the decade. While the Government’s planning reforms deliver a modest boost to the level of potential output of 0.2 per cent in 2029, its cumulative growth between 2023 and 2029 is still ½ a percentage point lower than we projected in October, and the level of productivity is over 1 per cent lower.
Sadly events have followed the course I predicted back on October 31st last year.
As you can see this is both contractionary ( fewer jobs) and inflationary.
Looking at the numbers we see that the imposition of the rise in employer’s National Insurance has been followed by employment falls with the latest below.
Payrolled employment decreased by 41,000 employees (0.1%) in June 2025, compared with May 2025;
Actually the scenario I outlined last October hits the public finances in two ways. Firstly lower employment and economic growth decreases revenues. Secondly higher inflation raises expenditure on benefits and debt costs via our index-linked bonds.
Economic Growth
The NIESR expects this.
GDP is expected to grow modestly over the medium term – by 1.3 per cent in 2025 and 1.2 per cent in 2026 – as businesses report elevated uncertainty and trade policy volatility weighs on UK exports. However, supportive fiscal policy and the rebound in business investment in the first quarter of this year should continue to underpin growth.
The problem with that to my mind is that there is a clear danger of the UK under performing that. It is the view across what I would call the economics establishment as towards the end of last month the IMF told us something similar.
The economic recovery is expected to gain momentum this year and next. Growth is projected at 1.2 percent in 2025 and 1.4 percent in 2026, as monetary easing, positive wealth effects, and an uptick in confidence bolster private consumption, while the boost to public spending in the October budget will also help support growth.
Actually as we grew by 0.7% in the fort quarter then the highlighted sentence s simply not true as growth will be weaker than that. Maybe with the UK stock market in what for it has been a really good run with the FTSE 100 above 9100 today we may see some wealth effects. But as such rallies in the FTSE 100 have been to say the least thin on the ground then it is impossible to quantify.
Also the growth momentum claimed is heading into the opposite direction to the employment figures I noted earlier. Pius these is this.
Monthly real gross domestic product (GDP) is estimated to have fallen by 0.1% in May 2025, following an unrevised fall of 0.3% in April 2025.
The PMI numbers are more optimistic but even they picked up a slowing yesterday.
At 51.5 in July, the seasonally adjusted S&P Global UK PMI
Composite Output Index eased from June’s nine-month high
of 52.0. However, the latest reading still signalled a modest
overall expansion of private sector activity.
Also in the detail there was something clearly heading in the opposite direction.
Moreover, private sector employment decreased again, with the rate of job losses the fastest since February.
That is of course particularly awkward for a Chancellor that raised employment taxes.
This morning has brought something else which is troubling when we are supposed to be building 300,000 new homes a year. The emphasis is mine.
“Having trended upwards in recent months, our
survey data for July signal a fresh setback for the UK
construction sector, with total industry activity falling
at the sharpest rate since May 2020. Dissecting the
latest contraction, we can see a fresh and sharp drop in residential building, as well as an accelerated fall in work carried out on civil engineering projects”
Taking a risk with inflation
This from the NIESR provides something of a reminder of the Bank of England looking away from its inflation mandate.
We anticipate two more 25 basis‑point rate cuts in 2025, followed by a further cut in 2026. Although an uncertain economic outlook may limit the Bank of England’s room for manoeuvre, we expect the MPC to continue its gradual easing, even with short-term upward pressure on prices this year.
I cannot disagree with the expectation but do not agree with the cuts themselves. After all policy seems to be hitting the poor again.
We expect living standards to grow modestly in 2025-26 for middle- and high-income households but decline for the poorest 10 per cent. For these households, higher-than inflation increases in housing and food costs are likely to outstrip income growth.
That returns me to the point I made earlier about the FTSE 100. In isolation the rally is welcome especially for those with pension funds. But yet again we see the wealthy winning.
Comment
As recently as last month Chancellor Rachel Reeves told us this in her Mansion House speech.
…it was our government, this government, that restored Britain’s reputation as a beacon of stability by putting the public finances back on a firm footing…
And fiscal stability is a choice that reflects economic reality.
The reality is that the U-Turns on public spending leave her in a position where to use her own words we have two “Black Holes” rather than the one she claimed last year.
There are quite a few echoes of the mid to late 1970s here as we see a stagflationary environment for the economy. Plus a government somewhat trapped by the public-sector pay rises it gave on coming into power that rather than stopping strikes in the NHS now sees resident doctors asking for more. So in terms of public expenditure we are singing along with Elvis.
We’re caught in a trapI can’t walk outBecause I love you too much, baby
.
