The UK is in a doom loop and the Labour government has got no idea how to escape it.
Michael Roberts is an Economist in the City of London and a prolific blogger.
Cross-posted from Michael Roberts’ blog
Today, Britain’s Labour Chancellor (finance minister) Rachel Reeves presented her Spring Statement on government spending plans for the next few years. She claimed that, after her prudent control of government finances i.e. not too much spending along with higher taxes, Britain’s public finances were now under control following the profligate spending of the previous Conservative government. Now Britain was set to motor upwards, having regained the confidence of international investors and the domestic corporate sector.
But actually nothing has really changed in the British economy except for the worse. Since winning the election in July 2024 (with lowest winning share of the vote ever) the government has floundered with one ‘U-turn’ after another: reversing its decision to end the winter fuel allowance for pensioners; reversing the cap it put on child benefits for families with more than two children; reversing its decision to raise income tax rates (which was against election promises); among many others.
Meanwhile the UK economy has floundered. Real GDP growth in 2025 was just 1.3% (below the forecast at the beginning of that year) and in the last quarter of 2025, that rate fell to just 0.1% yoy. The forecast for this year by the Office for Budget Responsibility (OBR) is for real GDP growth of just 1.1%, reduced from a forecast of 1.4% only six months ago.
Output per person is much the same as it was in 2019 before the pandemic slump. Trend growth in output per person is thus way below the rate before the Great Recession of 2009. If that pre-recession trend had continued, UK real GDP per person would be around 30% higher today. And in the case of Britain, this gap in trends has been widened by Brexit, when the UK left the EU and lost its trade share in Europe – the latest estimates reckon that this has cost 4-6% of UK GDP since 2016.
As for inflation, the UK had a rate of 3.4% in 2025, an average 1.0 % point higher than the average of other advanced economies. Within that, British households suffer the highest electricity prices in the world! British households have gone from paying ordinary costs by international standards to footing some of the highest bills in the world. Inflation is expected to fall this year, but that forecast could be blown apart by rising globlal energy prices, oil and gas, if the Iran war lasts for an extended period. Far from falling towards the Bank of England’s 2% a year target, the inflation rate could spiral back towards 5% a year.
At the same time as inflation has stayed high, unemployment has started to rise to a five-year high.
The UK economy is locked into a stagflationary environment.
In previous posts, I have outlined in detail how the British capitalist economy is broken. Now the Resolution Foundation, a UK think tank, has published a miserable analysis of the situation for most British households and, in particular, British youth. “Unsung Britain” – are the 13 million working-age families (containing 27 million people) living in the bottom half of the disposable income distribution. “These families are working more, caring more, and contributing more than in previous generations, yet the rewards for those efforts have stagnated.” Typical disposable incomes for this group have grown by just 0.5 per cent a year since the mid-2000s – a fraction of the growth enjoyed in previous decades. In the 40 years leading up to 2004-05, incomes for similar families doubled. At today’s pace, achieving the same improvement would take over 130 years!
Working-age benefits have been squeezed repeatedly since 2010 through freezes and targeted cuts – although these cuts took place alongside rising spending on pensions and disability benefits, meaning overall welfare spending has not fallen. Council tax has grown increasingly regressive, while recent inflation – particularly in energy and food – has hit lower-income households hardest. The result has been a surge in arrears on both energy bills and local taxes, with financial strain shifting from consumer credit into essential household bills. Health inequalities have widened, with large gaps in healthy life expectancy between richer and poorer communities. Disability is also rising, particularly among working-age adults, with mental health problems playing a growing role. Almost a third of poorer disabled people report being unable to work because of their health.
Young people face a particularly difficult outlook. The UK’s youth unemployment rate is now above the EU average for the first time since records began.
With house prices way above what most can afford, there has been a sharp shift away from home ownership and towards private renting, with around 8.6 million lower-income Britons now living in the private rented sector, where housing costs consume, on average, 43 per cent of disposable income. In order to alleviate its acute housing affordability crisis, London has been set a target of building 88,000 new homes per year over the next decade. Last year construction started on just 5,891 — 94 per cent below target, a 75 per cent year-on-year decline, the steepest drop in the country, the lowest tally since records began almost 40 years ago and the lowest figure for any major city in the developed world this century.
The reason for Britain’s failure has been well documented. Productivity growth has been pathetic; and that is because business investment growth has been feeble. Reeves admitted that UK productivity growth and investment is the lowest among the G7. But how to change that, she had no convincing policy solution. The Labour government’s solution is to ‘deregulate’ the business sector from red tape, avoid taxing the rich with any wealth tax; allow the City of London (which Reeves calls the ‘jewel in the crown’ of the British economy) free rein, while keeping public sector spending under tight control – just as previous Conservative governments wanted to do (but often failed).
The Labour government starts from the apparently self-evident premiss that there is no alternative to a capitalist economy, which means that faster investment must come primarily from the capitalist sector. But the British corporate sector is falling behind. Indeed, it is collapsing in parts.
The OBR report makes it starkly clear that Britain needs to increase the profitability of its corporate sector to provide the incentive to invest. The OBR points out that corporate profits have trended down as a share of GDP since 2020. The real rate of return on corporate capital has fallen from 13¾ per cent in 2022 to 11¾ per cent in 2025. That must reverse at the expense of labour incomes: “weekly pay growth has slowed from 2.5 per cent in 2024 to below 1 per cent in late 2025. In the medium term, we assume real hourly earnings growth will be below productivity growth at around ½ a per cent a year as firms rebuild their rate of return on capital, which has been relatively low in recent years.” Firms need to “rebuild margins”. But even then, the OBR forecasts the real rate of return by 2030 at only just above 12%.
The Resolution Foundation calls for a more radical solution to the failure to invest – ‘creative destruction’. Zombie companies (that make no profit) must be allowed to die o make way for new innovative firms to reap the profit pool. But as the RF says: “Here’s the catch. Creative destruction has two parts, and so far we’ve mainly got the latter. The destruction is clearly happening – firms going bust, workers being laid off. But the creation? Not so much. We’re not seeing a wave of new firms starting up to absorb those workers. Hiring at expanding firms isn’t (yet) big enough to pick up the slack.”
There is an alternative to ‘creative destruction’, which is only designed to boost capitalist sector profitability. It is a massive increase in public investment through public ownership of the banks and strategic industries in a national plan for investment in technology, education, health, housing, transport and communications. Instead, this Labour government is keener to reduce public sector debt by running a ‘primary budget surplus’ ie more tax revenues than spending, so that big business and bond investors stay on board. The only area of significantly increased public investment will be for ‘defence’ and arms, with Labour committed to more than tripling its defence spending as a share of GDP in the next ten years. The irony is that ‘austerity’ will put public finance “in a worse position compared to both the 2007-2019 and pre-2007 medians throughout the forecast” (OBR). This will be the case “despite the forecast improvement in the primary balance because of relatively high interest costs and low economic growth.”
So there is no spring in Labour’s plan. No wonder it is losing by-elections and currently has its lowest-ever share of the vote in public opinion polls, less than half the share it got in the July 24 election.
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