Britain’s economic growth to be weakest in a century except for pandemic and WWII, think tank warns
Britain’s economic growth this decade will be the weakest in a century, barring the Covid pandemic and the depths of the Second World War, despite Sir Keir Starmer and Rachel Reeves putting it at the heart of their government mission, a leading think tank has warned.
The warning from the Resolution Foundation, the think tank thought to shape Labour’s economic policy, came as the Institute for Fiscal Studies (IFS) questioned Rachel Reeves’ plan to cut high levels of debt and warned that tax rises or spending cuts would be needed to boost defense spending.
The criticism came after the Office for Budget Responsibility (OBR) said gross domestic product (GDP) would rise by just 1.1 per cent in 2026; This was up from the 1.4 per cent the chancellor had forecast in November after making his spring statement on Tuesday.
The watchdog raised its forecasts for 2027 and 2028 by just 0.1 percent, from 1.5 percent to 1.6 percent.
The Resolution Foundation’s assessment of the chancellor’s speech warned that Britain’s “overall economic picture remains bleak”, despite the prime minister repeatedly insisting that “his number one mission is economic growth”.
“The OBR is forecasting the weakest decade of real growth since the great depression through 2028, barring the depth of the global pandemic and exceptional shocks linked to the Second World War,” the think tank said.
Meanwhile, the IFS has warned that meeting NATO’s commitment to spend 3.5 per cent of national income on defense would cost £35 billion a year in today’s terms (equivalent to the current spending of the Ministry of Justice and the Home Office combined).
As an example of the government’s options, the IFS said financing the increase in defense spending would mean 3 to 3.5 percentage points over the main VAT rate.
IFS director Helen Miller said: “The takeaway from this is that we should not expect the government to meaningfully increase the amount we spend on defense without significantly cutting other government programs or increasing taxes – if that is what it wants to do.”
He said events in the Middle East and market reactions represented Wednesday’s “big economic news” rather than Rachel Reeves’ spring statement.
Ms Miller added: “Gas prices rose more than 20 per cent yesterday and are up almost 80 per cent on Friday. The stock market is down almost 3 per cent. The cost of borrowing has risen sharply. Perhaps these changes will be short-lived. “There are many days of big market moves that we quickly forget about.
But if the war in the Middle East drags on, it will clearly be bad news for all of us, including the chancellor.
“From an economic perspective, higher oil and gas prices and greater economic uncertainty will negatively impact economic growth. As inflation rises, disposable incomes will fall. Higher inflation will likely mean higher interest rates.”
It comes as a senior member of the budget watchdog warned that Britain’s historically high tax burden could stifle growth.
Speaking at the Resolution Foundation’s press conference following the spring announcement, David Miles, a member of the OBR’s budget accountability committee, said there was uncertainty as the tax burden was moving into “unknown territory”.
The tax burden, or tax take, is a measure of how much the government collects in taxes, expressed as a proportion of GDP, which is a measure of the size of the economy.
The burden is forecast to be 36.3 percent in 2025/26, unchanged from the previous forecast, then increase with each successive year, reaching 38.5 percent in 2030/31, above the previous forecast of 38.3 percent.
This is the highest level since current records began in 1948.
Prof Miles said: “The size of this increase is going to be huge. Taxes relative to GDP are currently on a trajectory that looks like they could increase by around 5 percentage points of GDP compared to a few years ago. So this is a huge increase in taxes.”
“Tax take-up of GDP in the UK is likely to be higher than it has been since the end of the Second World War.
“So this is going into uncharted territory in the UK’s recent economic history.”
The Solution Foundation also pointed out that unemployment is expected to be even higher than the pandemic, and stated that the OBR’s forecasts predict that unemployment will peak at 5.33 percent in the third quarter of 2026. This figure is slightly higher than the peak of 5.3 percent recorded during the pandemic.
But the chancellor said he was “confident” the government could outperform economic forecasts, warning against any “change of course” and delivering a spring statement devoid of any tax or spending policies as part of an attempt to stick to just one major fiscal event each year and boost stability.
On Tuesday, Rachel Reeves said her fiscal plan was “more necessary than ever in a world of uncertainty where the Iran conflict threatens economic stability.”
But the Solution Foundation think tank said the country’s immediate economic future was “extremely uncertain”.
The think tank said Britain was set for a year of strong growth in living standards, especially for low-income families, but the longer economic outlook was “gloomy”.
Ruth Curtice, the organisation’s chief executive, said: “The immediate economic outlook for the UK is highly uncertain, yesterday’s forecasts are already out of date and the living standards picture for the rest of the parliament remains highly uneven.
“Next year will be good for living standards and good for poor families, as wages and welfare support rise above inflation levels. But a new energy price shock risks spoiling this good news.”
“While wage growth is expected to slow, the living standards situation for the rest of the parliament is bleak.”
It comes as the Chancellor on Tuesday sought to reassure MPs about the potential impact of Donald Trump’s war with Iran on oil and gas prices and how it could affect the UK, claiming the government is in a “better place” to deal with gas and oil price shocks than it was after the last general election due to rising tensions in the Middle East.
