Budget 2025: The Chancellor Needs Economic Growth
One of the most important pre-Budget assumptions that will determine tax policy at the next budget will be that of economic growth. Any further downturn in economic growth forecasts will see any remaining fiscal headroom quickly disappear – resulting in inevitable tax rises.
From 1990 to the Global Financial Crisis (GFC) in 2008, the UK’s economy grew by about 2.6% a year in real (post-inflation) terms. Since then, the average growth has been just 1.0% a year. Had the pre-GFC growth rate continued, by now the UK economy would have been over a quarter larger than it is. A similar story can be seen for other UK economic measures, notably real (post inflation) household disposable income.
The UK’s depressing economic story does not end there. Since the GFC the UK’s real economic output per hour has increased by 6% - however this compares poorly against a 10% increase in the Eurozone and 22% in the USA. Among the major economies, only Italy has recorded a worse performance.
Why the UK has performed so poorly is unclear. Various factors loom large - The fallout from the GFC, Brexit, the pandemic and revolving prime ministers have all taken their toll, but arguably the most significant two – the GFC and the pandemic – were global events and apply to all countries.
The current Government came to power with a manifesto proclaiming a major economic mission to “kickstart economic growth to secure the highest sustained growth in the G7; including good jobs and productivity growth in every part of the country making everyone, not just a few, better off.”
Given that the Government had no control over how the other six G7 members’ economies perform and was thus never able to achieve this goal on its own, the growth mission has since been significantly watered down to delivering an “increase in living standards over the Parliament”.
Nevertheless, growth is still essential to the Chancellor as she looks to navigate her self-imposed fiscal rules at the coming budget.
To see why growth is important, let’s start with the size of the UK economy (GDP), which in round numbers is worth £3,000 billion a year. The current tax/GDP ratio is 36.8%, which will peak at 37.7% in 2027/28. Crudely speaking, if Rachel Reeves wants to find another £20bn– which is around the consensus estimate for the November 2025 Budget black hole - she could:
add 0.67% to the tax/GDP ratio (roughly equivalent to two percentage points on all income tax rates – manifesto pledge notwithstanding),
leave tax rates unchanged and hope for an extra 1.8% real growth in GDP to deliver the same additional revenue (1.8% x 36.8% = 0.67%), or
some mix of the two.
Of those three, it is obvious that any politician hoping to be re-elected would prefer the extra economic growth. However, in the UK, the Chancellor would need to convince, an often-sceptical OBR, that the Government’s policies will deliver this necessary growth. In March, the OBR projections were for real GDP growth of 1.0% in 2025, 1.9% in 2026 and between 1.8% and 1.7% for the following three years. However, the average independent forecast collected by the Treasury now has 1.1% for this year, but only 1.0% for 2026. The highest independent forecast for 2026 over the past three months has been 1.5% - 0.4% less than the OBR’s March figure. Now go back to the previous paragraphs and apply the maths in reverse: a 0.9% shortfall (1.9% - 1.0%) in real GDP growth is a 0.33% fall in tax revenue – another £10bn to find from somewhere.
The latest monthly GDP figures, show a 0.1% fall in May after a 0.3% drop in April, are further evidence that the UK economy is flatlining after a good (+0.7%) first quarter, probably aided by a pre-Trump tariff boost. As the Autumn Budget approaches, expect to hear more speculation about economic growth projections alongside all the usual tax change rumours.
What does all this mean for later life financial planning? Over the next few months in the lead up to the Budget on 26th November we will be providing insightful commentary and advice for those in later life. This can be best accessed reviewing our regular blog articles and commentary on the Harold Stephens website and social media channels. Head over to ‘Harold Stephens IFA’ on You Tube and subscribe to the channel to get the very latest videos direct from Richard Higgs, later life financial planning specialist.
Finally, register and reserve your place at one of our 2 post-budget Later Life Financial Planning live events to be held on Wednesday December 3rd 2025 by emailing office@haroldstephens.co.uk.