Labor has come to power and the economy is in decline.
It is This is not the news the Chancellor expected, and it highlights the challenges she faces in delivering on the government’s promise to boost growth.
The economy contracted by 0.1% in September and grew by just 0.1% in the first three months of the new Labor government.
There is an alternative version of this. A new government came to power with a big growth program. This should have sparked optimism among businesses and consumers.
The drop in interest rates in August should have provided further impetus. On the contrary, confidence seems to be collapsing.
Business groups say uncertainty over tax hikes may have “played a role” in the poor performance.
The Chancellor says she is “dissatisfied” with the latest results but once again asks us to be patient with her. His plan is long-term to turn around the economy.
It attempts to remedy chronic problems through reforms and investments that may take time to bear fruit.
Today, she was trying to shift the debate from tax increases to reform and investment. In recent days we have heard about major reforms in the pensions sector, and we expect more in terms of planning.
In her speech at Mansion House yesterday, the Chancellor also hinted she was considering a closer relationship with Europe, saying Brexit had posed “structural challenges”.
This feels like a moment, not only because of Reeves’ remarks, but also because of an intervention from Andrew Bailey.
Officials have repeatedly avoided talking about Brexit, even though economists have repeatedly warned the move would weigh on the country’s growth potential, with the OBR forecasting an impact of 4% over the next 15 years.
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Yesterday, however, the Governor of the Bank of England waded into the debate, saying he wanted to be honest about the “consequences” of Brexit. A change could be in the air.
Labor has so far ruled out rejoining the customs union or single market, but closer ties with Europe are an obvious area for a growth-seeking chancellor to explore.
As the Chancellor looks for ways to unlock long-term growth, she is under pressure to meet public expectations for improved public services now. This requires spending money, money that is harder to come by when the economy is not growing.
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His efforts to close that gap – a huge increase in corporate taxes – could undermine his efforts to generate growth. Economic forecasters warn that wages will suffer, unemployment could rise and inflation could increase (although far from the double-digit levels it reached at the end of 2022).
In fact, supermarkets, including Sainsbury’s and M&S, are already warning that prices may have to rise due to the increase in employer social insurance.
The prospect of rising inflation is bad for living standards, which have fallen over the past two years as inflation ravaged the economy.
The Office for National Statistics (ONS) reported that GDP per capita, which divides output by population, fell 0.1% in the third quarter, after recovering in the first half.
It remains below its level at the end of 2019, meaning we still haven’t recovered from the cost of living crisis.