Phil Wickenden: After a noble but flawed Budget, what next?

I think it’s better to be overly ambitious and fail than to be under-ambitious and succeed in a mundane way. But then I’m not running the country’s economy. And in the midst of such volatile times, I can’t help thinking that a spot of mundane success would feel like quite a win.

For better or worse, though, ‘prosaic progress’ doesn’t appear to be part of Keir & Co’s credo. The chancellor has heralded what she hopes to be “a decade of national renewal”, but the last two months have seen sequential real GDP decline – 0.1% in September and in October. So what can we expect in 2025?

A recent paper from Harvard Business school shows how goals can be beneficial when they are carefully crafted to meet an organisation’s culture and environment. This means identifying and avoiding goals that employees and the organisation are not well-equipped to meet.

By this yardstick, Labour’s bold ambition to “post the fastest sustained growth among G7 nations” appears potentially flawed on two counts.

An unfriendly environment

First, in relation to ‘environment’, how much control a government has over its country’s GDP is debatable. While government policies can certainly influence economic growth, GDP is at the mercy of a wide range of other unpredictable and uncontrollable forces, such as geopolitical developments or even the weather.

Most accept that it is not Government per se, but rather business, that drives growth – a tenet that this Labour Government, in its earnest ambition, has forgotten, or perhaps never fully grasped.

This is perfectly embodied in oddly anomalous moment the Chancellor pronounced that “change must be felt. More pounds in people’s pockets. An economy that is growing, creating wealth and opportunity for all” … and then proceeded to announce employer NIC rises that, in their October 2024 Economic and Fiscal Outlook, the OBR estimated will reduce the level of potential output by 0.1% at the forecast horizon, by reducing labour supply by around 50,000 average hours equivalent.

Creating a more punitive environment for business is not going to be helpful

If growth is Labour’s number one priority, and business is what drives it, then even the most rudimentary pre-Budget scenario planning would surely have flagged that creating a more punitive environment for business is not going to be particularly helpful.

But as Czech novelist, Milan Kundera noted in The Unbearable Lightness of Being, “political movements rest not so much on rational attitudes as on fantasies, images, words and archetypes that come together to make up this or that political kitsch”.

It’s hard not to look at this fledgling Labour Government, caught up in their well-meaning hubris, and think of Ancient Greece and the concept of Hamartia – a fatal flaw leading to the downfall of a tragic hero or heroine. Aristotle’s tragic heroes are noble but flawed. They are morally grounded, but commit, without evil intent, great wrongs or injuries that ultimately lead to their misfortune, often followed by tragic realisation of the true nature of events that led to this destiny.

Time, of course, will tell.

Harvard Business School’s second precedent

This is “avoid goals that employees and the organisation are not well-equipped to meet”. Revelations that Rachel Reeves has been economic with her CV, but less so with her actual work experience, will do little to engender confidence though it is possibly more an issue of trust. But the proven link between trust and economic prosperity shouldn’t be overlooked.

Academics aside, it is fair to say that things are looking far from rosy. Ahead of the election, Sir Keir Starmer expressed an ambition for the UK’s annual GDP growth to reach 2.5%. The new government’s aim to post the fastest sustained economic growth among G7 nations hinges on ranking first for increases in per-capita output for two years running by the time of the next election. This is something, according to OECD data dating back to the 1970s, Britain has never achieved.

The proven link between trust and economic prosperity shouldn’t be overlooked

A very similar pledge also appeared in the government’s “Plan for Change”, which was launched on 5 December 2024. In it, the government said it would “aim to deliver the highest sustained growth in the G7”, rather than “secure”, as was the wording in the manifesto. This has been interpreted by some to represent a weakening of the original pledge, which in itself doesn’t exactly bode well so early into this parliament.

Labour’s manifesto didn’t specify what timeframe it expects to deliver this pledge within, or what it means by “sustained” growth. Incidentally, the Treasury were asked about this in October 2024, and again in November 2024, but so far have not provided a definitive response.

So far, we only have comparative growth data from Labour’s first quarter in government—July to September 2024. This data was released by the ONS on 15 November and shows that in this period the UK’s GDP grew by 0.1% compared to the previous quarter, following growth of 0.5% in April to June 2024.

The UK had the third lowest level of GDP growth in the G7 in Labour’s first quarter in government, according to OECD data. France’s GDP grew by 0.4% compared to the previous quarter, the United States by 0.7%, and the GDP of both Canada and Japan grew by 0.3%. The UK’s growth figure slightly outstripped Germany’s, with the OECD’s detailed analysis putting them at 0.142% and 0.105% respectively, while Italy’s GDP had no growth.

Labour will have to find another 0.7% growth next year and 0.4% more growth in 2026

While monthly comparisons among G7 nations are not currently available, it’s worth noting the latest monthly data shows the UK experienced negative growth in both September and October 2024. This comes after three months of consecutive growth in the previous quarter and suggests we may see a fall in the UK’s GDP when growth figures for the current quarter, October to December 2024, are released in 2025.

In terms of forecasts for next year, the OECD indicated that GDP growth will now strengthen to 1.7% next year as it is “boosted by the large increase in public expenditure set out in the Autumn Budget”. But this will then slow to 1.3% in 2026. By comparison, baseline modelling predicts real U.S GDP growth of 2.4% in 2025 before slowing to 1.7% in 2026. GDP growth then ranges from 1.9% to 2.1% between 2027 and 2029.

So, to fulfil their self-proclaimed ‘number one’ manifesto pledge, Labour will have to find another 0.7% growth next year and 0.4% more growth in 2026. No mean feat. Rachel Reeves’ actual experience in customer complaints, rather than as an economist, may well come in handy.

Phil Wickenden is founder of Ad Lucem