A welcome Q1 but the Government must drop its fiscal rules to spark further growth
Professor Joe Nellis May 16th 2025
GDP growth of 0.7% for Q1 2025 is welcome news for the Government. To maintain the Chancellor’s slim fiscal headroom, economic growth is imperative — without the subsequent increase in tax revenues the government cannot stick to its fiscal plans.
A key factor in this growth has been the resilience of consumer activity — the rise in retail sales each month in Q1, driven by net positive real earnings growth and sunny weather, is reflective of this and will have contributed to the uptick in GDP in Q1. This is alongside the one-off stimulus of government spending from the Autumn Budget and a front-loading of export purchasing ahead of tariff imposition.
However, this uplift is likely to be only temporary. Increased government spending and the rush for exports were by their nature one-time boosts that are not repeatable catalysts for sustainable growth.
Despite the UK outperforming many of its peers in relative terms, the future medium term economic outlook does remain worrying. Despite the modest tariff victories on cars, steel, and aluminium earned by the Prime Minister last week, ongoing trade tensions and US tariffs will hit GDP later this year. The elevated employment costs outlined in the Autumn Budget have begun to kick in from April, cutting businesses’ profits (and ability to reinvest) and slowing recruitment. The Government would be helped by further interest rates cuts by the Bank of England, but the split in the Monetary Policy Committee at its last meeting suggests that this is not as much of a certainty as was once thought.
All this means that the foundations for sustainable growth have not been set. Burdened by election promises drawn up twelve months ago, in a very different economic environment, to not raise taxes on ‘working people,’ the Government appears to have no way out of this predicament if it sticks to its current fiscal rules — it has boxed itself into a corner. It has the power to change this stance.
The Government’s two economic goals: cutting the deficit and creating a growing economy are currently two incompatible ideals. Of the two, they must prioritise growth. While they have already expanded public investment in the economy, they must also encourage corporate investment, something that cannot be done within the constraints of the current fiscal rules.
Economy outlook
"The global economy is in a difficult place, and the Government has a tough fight on its hands to reinvigorate our sluggish economy in the midst of such uncertainty. However, they would make this fight somewhat easier if they stopped tying their own hands behind their back and discarded their burdensome fiscal rules."
