The UK economy has lost its momentum: what must the next Chancellor do?

The UK economy returned to positive territory in May, with GDP rising by 0.1 per cent after a 0.1 per centdecline in April. Activity has steadied, but the surprisingly strong growth in the first quarter of the year feels a distant memory as the economy suffers from the ramifications of continued tensions in the Middle East.

Households are increasingly cautious, businesses are still adjusting to higher employment costs, and many firms are still holding back on investment projects until there is greater clarity over the economic outlook. This combination continues to limit the pace of any recovery.

While chancellor Reeves is set to be replaced under prime minister Burnham, her successor faces the same problems. Much stronger and more sustainable economic growth is still needed to generate higher tax revenues and ease pressure on public sector finances.

Given that Andy Burnham has committed to sticking to the current fiscal rules, this is vital to create the fiscal headroom required to deliver on spending priorities without further tax increases. Policies that improve business confidence, encourage investment, and lift productivity are likely to become even more important over the coming months under a new prime minister and chancellor who will be keen to make their mark early.

The selection of the new chancellor is a key indicator of the direction of the incoming administration. A spendthrift choice would inevitably unsettle the markets. With borrowing costs already high, any further rise would make the Treasury’s fiscal position untenable, requiring significant cuts to public spending or an increase to the tax burden.

Andy Burnham's premiership could hinge on this decision, and reports that Shabana Mahmood is set to be appointed suggest he understands the challenge. The new chancellor must ease pressure from financial markets, channel investment into productive areas of the economy, and support stronger productivity growth. Of course, this is no small ask.

Emeritus Professor Joe Nellis, economic adviser at MHA