The UK economy has shrunk by more than expected in a major blow to Rachel Reeves, just one day after she unveiled her spending review.
The chancellor, who set out record investment in the Commons on Wednesday, acknowledged that the latest GDP figures, released on Thursday, were “clearly disappointing” but insisted her plan for the economy would help deliver growth.
The Office for National Statistics (ONS) said gross domestic product (GDP) fell by 0.3 per cent in April, compared with growth of 0.2 per cent the previous month and marking the biggest contraction since October 2023.
It was also worse than the 0.1 per cent contraction expected by most economists.
Ms Reeves argued that uncertainty about tariffs had contributed to the figures for April – the month Donald Trump announced sweeping levies on imports to the US.
“We know that April was a challenging month. There was a huge uncertainty about tariffs, and one of the things, if you dig into those GDP numbers today, is exports weakening and also production weakening because of that uncertainty in the world around tariffs”, the chancellor told Sky News.
She added that the figures were “not entirely unexpected, given the uncertainty that is out there in the world at the moment”.
On Wednesday, Ms Reeves announced a £39bn boost for social housing, £29bn for the NHS and £11bn for defence as she set out her spending plans for the next three years.
But experts warned she will have to break her manifesto pledge not to raise taxes or increase borrowing much further to pay for her promises.
In particular, there were concerns over how savings will be made on housing asylum seekers amid a surge in small boat crossings, and there were questions over how pay rises for public sector workers will be met.
It came after she told government departments that pay increases will need to be funded from their budget settlements. Already, resident doctors are threatening to go on strike if the government fails to meet their demands for a 29 per cent rise. Ms Reeves also promised to save £1bn by closing all asylum hotels.
Former government economist Jonathan Portes warned the spending outlined by Ms Reeves meant tax rises were “very likely”, while Institute for Fiscal Studies (IFS) director Paul Johnson warned: “The chancellor’s speech was full of numbers, few of them useful.”
Speaking on Thursday, Ms Reeves failed to rule out extra tax rises, telling BBC Radio 4’s Today programme: “No chancellor is able to write another four years of budgets within their first year of government”.
But she insisted that everything she set out at the spending review will be “paid for by the difficult decisions that I made early in this Parliament”.
She also doubled down on plans to make £5bn worth of benefits cuts, despite growing fears the plans would push disabled people into poverty.
“We’re not going to be changing that”, the chancellor said. “It is important that we reform how the welfare state works so that there is a welfare state there for people who need it, but people who are not able to work have nothing to fear.”
But Paul Johnson, from the highly-respected Institute for Fiscal Studies (IFS) think tank, warned Ms Reeves that any more economic bad news “will almost certainly spark more tax rises”.
As a result of the Spending Review, council tax is now set to rise at the fastest rate for 20 years, he added.
The health service was the big winner of Wednesday’s spending review, receiving an extra £29bn per year for day-to-day spending and more cash for capital investment.
Left-leaning think tank the Resolution Foundation said the British state is “slowly turning into a National Health State”, arguing that increases for the NHS came at the expense of other public services.
They noted that half of all public-service spending set to allocated to health and social care by the end of the decade, while investment in other public services across the British state is shrinking.
While real, per-person funding for health has increased by 36 per cent between 2009-10 and 2028-29, it has fallen by 16 per cent for Justice, 31 per cent for Work and Pensions, and 50 per cent for Housing, Communities and Local Government over the same period, the Resolution Foundation’s analysis shows.
Defence was another of Wednesday’s winners, they said, receiving a significant increase in capital spending while other departments saw an overall £3.6bn real-terms cut in investment.
The IFS made similar arguments about “substantial” investment in the NHS and defence coming at the expense of other departments, but Mr Johnson warned the money may not be enough.
“Aiming to get back to meeting the NHS 18-week target for hospital waiting times within this Parliament is enormously ambitious – an NHS funding settlement below the long-run average might not measure up”, he warned.
Responding to Thursday’s GDP figures, Michael Saunders, a former member of the Bank of England’s monetary policy committee and senior adviser at Oxford Economics, warned that the economy is likely to stay “sluggish” for the rest of the year.
He told BBC Radio 4’s Today programme: “The level of interest rates is still quite high, monetary policy is still quite tight, global trade uncertainty is high and that’s hitting exports from many countries around the world and the government is tightening fiscal policy.
“Public spending is going up but taxes are going up even more, so the net effect is to reduce demand, and you can see that reflected – that vacancies are falling, job growth is slowing and unemployment is rising.”
Meanwhile, the Tories said the fall in GDP was the result of “Rachel Reeves’ economic vandalism”.
Shadow chancellor Sir Mel Stride said: “Before the election Labour promised ‘growth, growth, growth’ but today’s fall in GDP lays bare the disappointing consequences of Rachel Reeves’ economic vandalism.
“Yesterday, the chancellor should have taken corrective action to fix the problems she has caused. But instead her spending review has all but confirmed what many feared: more taxes are coming.”
