Britain’s wealth squashed underneath Reeves… and it may get WORSE: Brits face an additional YEAR of flatlining wealth, a file tax burden with fears of extra to return… and the one factor propping up GDP is mass immigration
Brits are facing four years of flatlining wealth – and a new record tax burden – as a grim report underlined how even meagre economic growth has been driven by immigration.
In its latest outlook accompanying Rachel Reeves‘ Spring Statement, the Office for Budget Responsibility (OBR) said it does not expect real GDP per person to return to 2022 levels – before the energy crisis hit – until 2026.
That is around a year later than the Treasury watchdog anticipated at the time of the October Budget.
Meanwhile, the OBR highlighted the role of net migration – which has hit a new record annual high of 906,000 – in the growth of the economy over recent years.
It pointed out that official figures have revised up the size of the UK workforce last year by 1.5 per cent – half a million people.
However, real GDP did not gain much ground over the year, with economic output per hour worked falling. As a result GDP per person was lower.
The stagnation was laid bare as Ms Reeves set out a fresh wave of spending cuts to offset stalling growth.
The Chancellor stressed the grim realities facing the country as she delivered her Spring Statement to the Commons, arguing the ‘world has changed’.
She said she was ‘proud’ of her track record despite having a £14billion black hole in the finances to fill, after her huge tax-and-spend Autumn Budget was followed by an economic slowdown.
However, she admitted the OBR has slashed growth forecasts in half, to just 1 per cent this year. It expects inflation to average 3.2 per cent this year, instead of the 2.5 per cent it anticipated in October, and progress on productivity will be worse.
The tax burden is still on track to hit a record high of 37.7 per cent of GDP in 2027-28, from 35.3 per cent this year, with frozen thresholds inflicting more pain on Brits.
Worryingly, the OBR cautioned that the dismal predictions could easily be derailed by Donald Trump‘s trade war, or failure to secure productivity advances in the public sector.
In its latest outlook, the Office for Budget Responsibility (OBR) said it does not expect real GDP per person to return to 2022 levels, before the energy crisis hit, until 2026.
The OBR highlighted the role of net migration – which has hit a new record annual high of 906,000 – in the growth of the economy over recent years
The report said structural weakness in productivity was to blame for around a third of the one percentage point downgrade in forecast growth this year
Rachel Reeves delivered her Spring Statement to the Commons today
The alarming picture had put Ms Reeves on track to break her own ‘fiscal rules’ before she scrambled to make up the shortfall. She said it would be from spending cuts rather than more tax rises.
But the respected IFS think-tank said the plans were so tight that the tax burden might have to increase in the Autumn.
The OBR said the adult population is set to expand by another 2.1million people over the next five years, again driven by net inflows.
The watchdog is assuming that annual net migration will ‘fall sharply’ from 728,000 in the year to mid-2024 to a ‘trough’ of 258,000 in the year to mid-2027. It is expected to be 340,000 in 2029-30.
The OBR said: ‘Based on these latest ONS population projections, we now assume the adult population grows by 2.1million people over the next five years to reach 57.8million in 2029.
‘Annual adult population growth averages 0.8 per cent over the forecast period, in line with the October forecast.
‘In 2029, the adult population is half a million higher than in the October forecast, almost entirely reflecting the higher starting level.
‘It also revised up the level of real GDP by 0.8 per cent in mid-2024.
‘But real GDP growth largely stagnated over the second half of 2024 rather than continuing to grow, as we expected in the October forecast, meaning the level of output was broadly in line with our previous expectations by the end of 2024.
‘The net effect of these developments was that the measured level of productivity (output per hour worked) at the end of 2024 was 1.3 per cent lower than in the October forecast.’
The report said structural weakness in productivity was to blame for around a third of the one percentage point downgrade in forecast growth this year.
It said that for wider GDP ‘the permanent hit to productivity is partly offset by stronger workforce growth’.
The OBR said: ‘The higher starting point for the size of the workforce, weaker outturn data for productivity, the recent slowdown in GDP growth, and higher market expectations for energy prices and interest rates explain a large part of the changes in this forecast relative to October.’
The OBR cautioned that the latest upgrades to net migration still have not been factored into the ONS labour force figures – meaning more revisions are likely next year.
The measure of GDP per person fell by 0.9 per cent in 2023 and by another 0.1 per cent in 2024.
The OBR said it is expected to grow by 0.3 per cent this year. But that is much lower than overall GDP growth of 1 per cent.
The watchdog estimated that real GDP per person will not recover its 2022 pre-energy crisis level until the start of next year.
‘This is around a year later than we forecast in October, reflecting weaker near-term productivity growth,’ the body said.
A different measure of how well-off Brits are, real household disposable income (RHDI) per person, is expected to grow 0.5 per cent a year on average between 2025-26 and 2029-30.
However, that masks a dramatic slowdown from 2.5 per cent in 2024-25 to ‘almost no’ growth in 2027-28.
The OBR indicated that was due to factors such as firms rebuilding profit margins instead of increasing pay, passing on the cost of the the NICs rise, income tax thresholds remaining frozen, and slower benefits growth.
After the freeze in tax thresholds ends in 2028-29, the rate of increase in RDHI is expected to pick up again.
Although there were no significant tax changes in the Spring Statement, the OBR said the level is set for a record high.
The OBR has sharply downgraded growth forecasts for this year
‘Tax as a share of GDP is forecast to rise from 35.3 per cent this year to a historic high of 37.7 per cent in 2027-28 and remain at a high level for the rest of the forecast,’ the report said.
‘The sharp forecast increase in 2025-26 is largely due to the Autumn 2024 Budget increase in employer NICs, which takes effect in April 2025, and an expected recovery in capital tax receipts.
‘The further forecast rise in the tax take to 2027-28 is mainly due to growth in nominal earnings combined with frozen tax thresholds, further rises in capital taxes, and a boost to receipts from the Temporary Repatriation Facility (TRF) announced at the Autumn Budget as part of the reforms to the non-domicile regime.
‘The tax take is then forecast to level off as personal thresholds are unfrozen, the TRF window closes, and the take-up of electric vehicles reduces fuel duty receipts.’
In her speech, Ms Reeves confirmed she had suffered another major setback with the OBR rejecting the previously-claimed £5billion of savings from benefits reforms.
Instead they have been valued at more like £3billion – sparking a frantic last-ditch effort to find more cuts despite mounting fury from Labour MPs. Another £400million is being trimmed from welfare, taking the final expected savings to £3.4billion.
The package – formally signed off by Cabinet this morning – had originally been scheduled as a routine update on the public finances.
But the Tories claimed it was effectively an ‘Emergency Budget’ with the government needing a huge change in strategy.
Ms Reeves announced plans to tell Whitehall departments to cut administrative budgets by 15 per cent, expected to save £2.2billion a year by 2029-30.
Real-terms increases in departmental budgets are being scaled back sharply, although specific decisions will not be made until the Spending Review is finalised in June.
Laying out its views of the risks, the OBR report said: ‘Significant uncertainty surrounds domestic and global economic developments.
‘If the projected recovery in UK productivity growth fails to materialise, and it continues to track its recent trend, then output would be 3.2 per cent lower and the current budget would be 1.4 per cent of GDP in deficit by the end of the decade.
‘A 0.6 percentage point increase in Bank Rate and gilt yield expectations across the forecast would eliminate current balance headroom.
The rate of Consumer Prices Index inflation fell to 2.8%n February from 3% in January
‘And if global trade disputes escalate to include 20 percentage point rises in tariffs between the USA and the rest of the world, this could reduce UK GDP by a peak of 1 per cent and reduce the current surplus in the target year to almost zero.’
In a thinly veiled swipe at Donald Trump, the Chancellor tried to blame global challenges for the British economy’s stuttering performance on her watch.
‘We can see that the world is changing, and part of that change is increases globally in the cost of government borrowing – and Britain has not been immune from those challenges,’ she said.
Responding to the OBR growth forecasts, Ms Reeves said: ‘I am not satisfied with these numbers.
‘That is why we on this side of the house are serious about taking the action needed to grow our economy. Backing the builders, not the blockers.’
IFS chair Paul Johnson said the Chancellor had a ‘tiny, tiny’ amount of wiggle room with her £9.9billion headroom in 2029-30.
He told the BBC any small negative change in the outlook would ‘require some action’, suggesting economists will ‘spend the next six months speculating about tax rises’.
