By: Darwin Friend, head of research
The first GDP release of the new Labour government was always going to be of interest, especially as they report on the period directly before the chancellor, Rachel Reeves, delivered her first budget.
Yet few could have been prepared for the figures revealed by the Office for National Statistics (ONS) on Friday morning. They illustrate the British economy’s reaction to Labour’s election victory and the economic mood ahead of the Autumn budget, demonstrating that a pro-business environment is needed to drive growth and investment in the economy.
As the figures show, UK GDP growth for quarter three 2024 (July to September) was an anaemic 0.1%, down from 0.7% and 0.5% in quarter one and quarter two respectively. It seems the new era for economic growth, promised by the chancellor back in July has resulted in the lowest GDP growth since the end of 2023. These figures lay bare the scale of the task facing Labour if they are to deliver on their pledges of growth, investment and economic reform.
Growth was expected to be lower than previous quarters ahead of the ONS release, with some economists suggesting pre-budget nerves as the cause. That’s understandable given some of the pre-budget briefings, and the data does show a downtick in economic growth as the budget approached with growth of 0.2% in August and then -0.1% in September. In the build up to her statement, the chancellor and entire government should’ve been setting out the case to boost economic dynamism and laying the groundwork for a package of sustainable growth measures, which would’ve countered economic concerns.
Yet the nerves felt by many beforehand were justified when the chancellor stood up at the dispatch box. Announcing hikes in employers’ national insurance, capital gains tax and stamp duty, while cutting agriculture and business relief on inheritance tax. Rather than announcing a raft of measures to drive higher growth and employment, the government opted to confirm their sceptics' fears by hammering those which deliver jobs, better wages and are the backbone of the British economy with higher taxes.
And while the figures from the ONS only relay potential pre-budget nerves, there is a likelihood that lower growth will persist after the chancellor’s measures kick-in, especially the damaging rise in employers’ national insurance. This tax on jobs will mean less employment in the long term and lower wages, with the OBR forecasting 60% of the cost being passed onto workers initially, rising to 76% in the medium term. You’d think more jobs and higher wages would be something to be encouraged, not only for individual prosperity but for the bean counters at the treasury, which will receive less tax revenues as a result, too.
To make up for this bashing of business, Labour have bet all their chips on spending and thereby improving public services and seeing returns on capital investment. While these would be positive, there remains a big ‘if’ on whether the government can deliver either of these given that spending is already at its largest share of GDP since the mid-1970s (excluding the covid pandemic and global financial crisis years). The chancellor may say this additional funding will produce growth in the long-term, but if taxpayers don’t feel an improvement in public services and their personal finances soon then the ‘long-term’ may not be long enough for this government to still be in office.
No doubt those in the treasury will be biting their nails ahead of the next GDP release, as it will show the economic reaction to what the chancellor announced at the budget. If Labour are serious about wanting to deliver for working families and build a prosperous future for everyone in this country, then these GDP figures must serve as a wake-up call for the government to focus on growth. Reversing their damaging national insurance hike would be a good place to start.