Public spending fuels growth surge ‘no reason to celebrate’

Labour’s “spend now, tax later” approach to fiscal policy would drive growth higher than previously thought, an industry group said, but would leave Britain’s public finances in a “vulnerable” position.

The Confederation of British Industry (CBI) increased its growth forecast for next year from 1 per cent to 1.3 per cent, with an additional £11 billion in state spending plans revealed in the Budget explaining much of the difference in published forecasts between today and June.

The country also forecasts “moderate” GDP growth of 1.5 percent in 2027.

CBI economists said the increase came with a warning after it was revealed the government would increase borrowing in the next three years to allow it to spend more on welfare.

Most of the additional government revenue in the APBN gained through tax increases will flow from 2028 through a series of measures the CBI calls “spend now, tax later”.

A short-term boost to Rachel Reeves lending could be a “headwind to growth” beyond the CBI’s two-year forecast period, while Labor’s spending policy risks leaving the public purse in a “vulnerable” position.

Productivity growth trends are not expected to match pre-Covid-19 pandemic levels compared to last year, while industry group surveys show a sharp decline in business investment and capital expenditure intentions.

The forecast lowers business investment growth by 1.1 percentage points for 2026 from the previous projection of 1 percent.

Chief economist Louise Hellem said the increase in growth should be interpreted as “cautious optimism” and not “a cause for celebration”, warning that private sector growth was being hampered by “fundamental challenges” in regulation, taxation and energy.

“While the Budget did provide much-needed stability, too many bold choices were left unaddressed,” Hellem said.

“If the government is serious about restoring business confidence and enhancing its growth mission, it must immediately address some of the biggest obstacles to competitiveness.”

Slow growth will impact employment

The CBI has also taken a more cautious approach in calculating the impact of Budget measures on inflation.

The Office for Budget Responsibility (OBR) and the Bank of England have stated that efforts to remove green levies from energy bills could cut price growth by up to 0.5 percentage points.

However, the CBI expects inflation to fall more slowly than civil service economists assume, depending on how the government goes about green tax cuts.

Inflation is expected to slow to 2.6 percent next year and 2.3 percent the following year, still above the World Bank’s target of 2 percent.

The unemployment rate is also not expected to fall below 4.9 per cent until 2027 as businesses continue to face the £25 billion increase in national insurance contributions announced in Reeves’ first Budget in 2024 and another increase in the national living wage this year.