Growth forecast lowered - but Reeves insists plan is working

Chancellor Rachel Reeves has delivered her update on the state of the UK economy against the backdrop of growing conflict in the Middle East that is set to send energy prices soaring and create more market uncertainty.

The estimate for the country’s economic growth has been lowered for this year, but the chancellor insisted her financial plan is working.

In line with her commitment to only hold one fiscal event per year, she did not announce any new tax changes in the Spring Forecast.

However, the statement included downgraded OBR forecasts for growth in 2026 from 1.4 per cent to 1.1 per cent - growing slightly slower in 2026, and faster in 2027 and 2028.

She told the Commons: “This government has the right economic plan for our country” and said it had restored economic stability in an “uncertain” world.

The OBR says unemployment will peak at 5.3 percent this year and then fall gradually to 4.1 per cent by 2030. It also says the two per cent target on inflation will be met later this year.

The forecasts do not take into account any potential impact from events in the Middle East - but the OBR warns it “could have very significant impacts on the global and UK economies”.

Professor Joe Nellis, economic adviser at accountancy and advisory firm MHA, which has offices in Preston and Lancaster, says that since being elected last year, the UK government’s record on economic growth has been cautious rather than transformative.

The economy has avoided recession but many of the chancellor’s targets remain unmet.

He said: “The economy has stabilised and is showing some signs of life, but growth remains sluggish by historical standards.

“The government has prioritised fiscal discipline and credibility, but business investment has yet to recover decisively and productivity gains are limited.

“Without stronger investment, skills development and productivity reform, economic growth risks remaining steady but uninspiring.”

He added: The UK government’s record on unemployment has been disappointing, to say the least. The headline unemployment rate is now 1.1 percentage points higher than when they came to office.

“Hiring has slowed, vacancies have fallen, and youth unemployment has increased, raising concerns about school-to-work transitions and long-term skills scarring.

“There is a danger that our future workforce is irrevocably damaged as young people experience prolonged spells out of work. While some of this down to over hiring as we came out of the pandemic and potentially the early impact of AI, much of this is in the hands of the state.

“The key test for the government is whether it can prevent short-term labour market softness - particularly among younger workers - from becoming a long-term drag on productivity and growth.”

Anisha Chawla, private client tax manager at accountancy firm Menzies, which has an office in Blackburn, said that while a quieter Spring Statement may steady markets in the short term, a ‘say nothing now’ approach - particularly if it simply delays difficult decisions - will not rebuild confidence without a clear and credible long-term plan.

She said: “Businesses are not looking for difficult decisions to be quietly deferred in the hope they avoid scrutiny - they are looking for certainty and direction.

“Silence alone will not rebuild confidence. Recent increases in national insurance contributions and an inflated tax burden have placed significant strain on Britain’s businesses, especially smaller firms. Without a clear and consistent growth strategy, confidence will remain fragile, and investment and planning will continue to stall.”

Michael Barker, partner at Preston based independent accountants and business advisers WNJ, said: “Don’t confuse the lack of changes in policy, this time, for stability.

“The problems of youth unemployment, and the pressure from high taxes is likely to weigh down the growth potential for some years to come.”

Roger Philips of PM+M said: "The OBR numbers suggest that the UK remains broadly within its fiscal guardrails, helped by January’s record budget surplus and a presently manageable inflation position, albeit a downgrade in growth in the short term at least.

"This is something on which the chancellor’s fiscal policy depends so will not make welcome reading for her. In more stable times, and downgrade in growth aside, this would have provided Rachel Reeves with a degree of reassurance that her fiscal policy was working.

"However, the escalating crisis in the Middle East has quickly shifted the tone and therefore the numbers should be taken with a large pinch of salt.

"What does all of this mean for business? In this environment, proactive forward planning remains critical.

"Whilst the UK’s fiscal position appears stable for now, external factors, such as the impact of the escalating problems in the Middle East, underline how quickly that outlook can shift.

"Businesses and individuals alike should continue to stress-test assumptions, manage their cash flow carefully, and remain agile to enable them to weather the storm."

Rebecca Bradshaw, director at Preston based accountancy practice Rotherham Taylor, said: “The chancellor was clear this would not be a major fiscal event, as promised in Labour’s manifesto. That may suit the Treasury’s timetable, though it does little for businesses dealing with rising costs now and in the near future.

“There were no fresh measures to ease the immediate pressures facing employers, no tax changes to stimulate investment and no additional support for firms exposed to rising input costs. The only comfort was that there were no new compliance requirements or tax hikes to contend with.”