The Bank of England had some rare good news for Chancellor Rachel Reeves on Thursday when it cut interest rates.
The bad news? Just about everything else the Bank had to say. I can’t remember when I last read such a litany of woe about the British economy from an official organ of the state.
The Bank slashed by half its previous forecast of 1.5 per cent economic growth this year. It raised its forecast for inflation, now expected to be nearly twice its 2 per cent target by autumn.
It cut its estimate of how much business will invest in each of the next three years. It increased its forecast for the rise in unemployment (currently 4.4 per cent, heading for 5 per cent).
‘Business and consumer confidence has declined,’ reported the Bank. It still thinks we might avoid recession. But only by the skin of our teeth. It depends on the Bank being able to forecast growth accurately down to one-tenth of a decimal point. I would not bet what’s left of your savings on that.
For most it will feel like a recession, even if we are not technically in one. The Bank offers no joy on living standards: it thinks incomes (after allowing for inflation) will rise by only 1.25 per cent this year then barely at all (a mere 0.25 per cent a year) for the two years to follow. So much for that land flowing with milk and honey Labour promised.
What has caused such a dismal, across-the-board downgrade of our economic prospects in so short a time?
The Bank is characteristically coy. But the only economic event of major import to the UK economy in the past three months was the first Reeves Budget in October.
Sir Keir Starmer yesterday hunkered down with his Cabinet in Lancaster House, brainstorming on how to get a grip, writes Andrew Neil
Though it naturally does not say so in as many words, the Bank’s latest forecasts for the economy are a damning critique of the Chancellor and all her works.
Supporters of Reeves (there are still some, though increasingly fewer in the Cabinet) have taken to complaining that depicting her as ‘Rachel from Accounts’ is demeaning and even misogynist.
I don’t remember these same folk complaining when on TV I regularly described a rather dull Tory Chancellor, Philip Hammond, as ‘Spreadsheet Phil’.
But fair enough. Let’s drop the ‘Rachel from Accounts’ put-down. Now that the Bank of England (where she was an economist, as she regularly reminds us, albeit a junior one) has marked down her homework, it would anyway be more accurate to describe her as the Treasury’s very own ‘Beryl the Peril’.
The UK economy grew by less than 1 per cent last year. Almost all of that growth was in the first half of 2024, before Reeves got her mitts on the economic levers.
Now the Bank expects it to do even worse this year, with growth a mere 0.75 per cent. Next year doesn’t look that much better: growth could creep above 1 per cent – but not by much.
These are dire prospects for a Government that has made economic growth its central mission and pinned all its ambitions – more spending, rising living standards, no further tax rises or borrowing – on delivering it.
That core strategy, after just seven months in power, has crashed on take-off. Even pro-Starmer website LabourList has opined that ‘the Government’s hopes of avoiding austerity – or more tax hikes – become less and less likely’. It even mooted the prospect of welfare spending cuts to balance the books.
Keir Starmer yesterday hunkered down with his Cabinet in Lancaster House, away from the Downing Street Cabinet room to avoid the Press, brainstorming on how to get a grip.
But a largely second-rate cabinet (in places third-rate) with no knowledge of how a modern economy works and zero business experience, is unlikely to stumble upon the holy grail of growth. Belatedly, though, it has dawned on Labour that the real political threat is Nigel Farage’s Reform UK, not the Tories.
The UK economy grew by less than 1 per cent last year. Almost all of that growth was in the first half of 2024, before Chancellor Rachel Reeves got her mitts on the economic levers
It has now dawned on Labour the real political threat is Nigel Farage’s Reform, not the Tories
I’ve noticed Labour increasingly training its propaganda guns on Reform and Farage. A series of ads is being rolled out, using the same shade of blue as Reform, aimed at blunting its appeal.
‘Labour hits five-year high in migrant removals’ boasts one. When a party led by a man who once touted the virtues of open borders and free movement is reduced to this, it’s hard not to conclude that a certain panic has set in. It might not be misplaced.
A YouGov poll put Reform ahead this week for the first time on 25 per cent, one point above Labour, four ahead of the Tories.
Of course, one poll is not a political watershed. But a later poll this week put Reform on 29 per cent, four points ahead of Labour and a staggering 11 points ahead of the Tories. The Spectator magazine’s poll of polls now has Reform in the lead.
Perhaps even more interesting was YouGov’s finding that Labour now has fewer working-class voters than Reform or the Tories. The demographic group for whom the party was founded to help has deserted it, much as blue-collar workers have deserted the Democrats across the Atlantic – with dramatic electoral consequences for all to see.
Labour is aware of the risks. This week, two of its MPs were dispatched to Germany for ideas about how to deal with the rise of the radical right. I expect they came back empty-handed.
The ruling Social Democrats, Labour’s German sister party, is languishing at 15 per cent in the polls and about to be thumped in the general election later this month. The insurgent AfD, well to the right of Reform, is in second place on 21 per cent. It’s not clear what German lesson Labour should take from that.
If, as seems likely, Labour is destined to preside over stagflation – low or no growth, rising prices, growing unemployment – that can only hasten the drift to Reform.
The Tories, failing to cut through on any front, could even be reduced to a rump in the polls and at risk of a hostile takeover by Farage to make his party the true alternative to Labour. Or the Tories could just wither away.
Labour is short of remedies to deal with its own woes. The economy is stagnant because productivity growth is stagnant. That, in turn, is due to falling output per worker in the public sector.
Since the pandemic lockdowns, half a million more jobs have been created in the public sector – more staff in health, education and the civil service – but no commensurate increase in the output of public services. Hence falling productivity.
Far from paring back the public sector to pre-pandemic staffing levels, Labour plans to add yet another half-million. The Office for Budget Responsibility (OBR) assumes, based on its analysis of Labour policy, that public sector jobs, currently 5.8 million, will rise to 6.3 million by the end of the decade.
Thus does a bloated public sector with declining productivity drag down the whole economy.
With the best will in the world, it is hard to imagine Starmer-Reeves, with their statist view of the world, doing anything to reverse this process. So far everything they’ve done has enhanced it.
Depressingly for the Treasury’s very own Beryl the Peril, the gloomy prognostications of the Bank are just for starters.
The main course will be served by the OBR at the end of March when its previous forecast of
2 per cent growth this year (which many of us said at the time was optimistic) will be downgraded to about 1 per cent.
Lower growth means less tax revenue. Reeves will quickly discover she now has a real black hole in the public finances to cope with, rather than the one she concocted when Labour took power to justify the increase in taxes she had vowed in opposition not to do.
Some token spending cuts and more major tax rises will not be far behind. They might help her balance the books. But they will not shake us out of the stagnation to which she and Starmer have condemned us.
That, sadly, is likely to be their enduring legacy.
