Chancellor Rachel Reeves delivered a major speech this morning, outlining her plans to “kickstart” the economy and tackle the UK’s growth problem.
The headline promises included a third runway at Heathrow Airport and better connections between the research hubs of Oxford and Cambridge. Reeves also voiced the government’s ambition to turn the two cities into Europe’s answer to Silicon Valley.
It all sounds great in theory. In a week where Chinese AI company DeepSeek has sent shockwaves through US equity markets, Reeves’s tech ambitions sounded a topical note (despite understating Europe’s current laggard status when it comes to the AI race).
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Similarly, long-term infrastructure investment in the UK is much-needed. Heathrow is currently operating at capacity but a third runway could increase the number of flights from 480,000 to 720,000 per year, according to the BBC.
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Despite this, experts have warned that these projects are unlikely to do much to boost growth in the short term – or undo the damage caused by a Budget that significantly increased the tax burden for UK businesses.
“The chancellor and prime minister seem to be under the impression that governments somehow drive growth by pulling policy leavers, but in reality, growth is generated by the commercial decisions of businesses and consumers,” said Jason Hollands, managing director at investment platform Bestinvest.
He added: “It is that myriad of individual decisions that together make a market, not the directives of politicians, and the market contains more collective wisdom than the civil service. Where the government gets in the way of commercial decisions, through higher taxes and too much regulation, it simply stifles growth and can also lead to capital misallocation away from productive assets to pet projects.”
Growth projects unlikely to undo Budget damage
Reeves was in a tight spot when she delivered the Budget having promised not to hike income tax, employees’ National Insurance (NI) contributions or VAT. However, the decision to increase NI for employers is starting to sound more and more like a de facto tax on workers – not to mention a stumbling block for the UK economy.
A recent survey of 52 leading retailers, conducted by the British Retail Consortium, showed that 67% of businesses are planning to raise their prices this year in an attempt to mitigate the cost of the tax hike. Retailers including Tesco, Sainsbury’s, Next, Amazon and Boots have also written to Reeves warning that job cuts are “inevitable”.
This will drive the very opposite of growth, according to Andrew Craig, author and founder of Plain English Finance. Instead, he believes that measures announced by the chancellor will increase unemployment, insolvencies, capital flight, inflation and energy prices – potentially with severe social consequences.
As well as shifting the burden towards businesses, the government’s decision to leave the three main working taxes untouched has forced Reeves to focus on slim pickings elsewhere.
During the election campaign, Reeves promised to raise money by cracking down on non-doms, but this has backfired after data revealed that 10,000 millionaires left the UK in 2024 – a 157% increase compared to the year before. In September last year, the Guardian reported that the policy might actually result in no extra funds for the Treasury at all.
“It’s welcome the government is taking tangible steps towards growth, cutting red tape, and that it recognises the importance of turning around a prevailing negative narrative surrounding economic prospects. However, it is hard to square with the exceptionally high tax burden for both individuals and businesses, which only seems to be getting worse,” said Rob Morgan, chief investment analyst at wealth management firm Charles Stanley.
The devil is in the detail
Longer term, it is too early to say whether the projects announced today will contribute positively to the UK’s growth prospects. George Lagarias, chief economist at Forvis Mazars, said: “The devil is in the detail, not the headline”.
“What stands out from the Chancellor’s speech is the government’s willingness to increase public spending by 0.7% of GDP per annum, to 2.6%,” he added. “On the face of it, it is a net positive. However, it is difficult to say how much of that extra spending will be GDP-generating.”
Lagarias also pointed out that the UK is already running deficits, meaning funding would need to come from increased borrowing at a time when borrowing costs are persistently high.
This isn’t the only challenge the government will have to navigate, either. Projects like the Heathrow expansion will inevitably raise environmental concerns and invite backlash from community groups. Reeves has described net zero goals as being “the industrial opportunity of this century”, but it is unlikely to be that straightforward in reality.
Meanwhile, AI might be the buzzword of the moment but transforming the UK into an AI leader is a lofty ambition, particularly given how far ahead the US and Asia are in terms of the race so far. This too will need to be balanced with environmental considerations given that data centres are incredibly energy intensive.
