Britain's Economic Outlook Bleakest in a Century, Warn Top Think Tanks
The United Kingdom is facing its weakest decade of economic growth in a century, excluding the exceptional shocks of World War II and the global pandemic, according to stark warnings from the nation's two leading economic think tanks. The Resolution Foundation and the Institute for Fiscal Studies (IFS) have issued dire assessments just one day after Chancellor Rachel Reeves delivered her Spring Statement, casting doubt on the government's central mission to boost growth.
Growth Forecasts Downgraded Amid Global Uncertainty
The Office for Budget Responsibility (OBR) has indicated that gross domestic product will increase by just 1.1 per cent in 2026, a downgrade from the 1.4 per cent forecast in November. While the watchdog slightly upgraded its forecasts for 2027 and 2028 to 1.6 per cent, the Resolution Foundation's analysis warns that Britain's broader economic picture remains profoundly bleak. This comes despite Prime Minister Sir Keir Starmer repeatedly insisting that his number one mission is economic growth.
The Resolution Foundation stated: "The OBR is forecasting the weakest decade of real growth to 2028 in a century - i.e. since the Great Depression - outside of the exceptional shocks associated with the depths of the global pandemic and the Second World War."
Defence Spending Pressures and Borrowing Concerns
Simultaneously, the Institute for Fiscal Studies has raised serious questions about Chancellor Rachel Reeves' plans to reduce high levels of borrowing. The IFS warned that meeting NATO's commitment to spend 3.5 per cent of national income on defence would cost approximately £35 billion annually in today's terms - equivalent to the combined current spending of the Ministry of Justice and the Home Office.
IFS director Helen Miller explained the stark choices facing the government: "The takeaway is that we should not expect the government to be able to meaningfully increase what we spend on defence - if that's what it decides it wants to do - without significantly cutting other government programmes or raising taxes."
As an example, the IFS noted that funding such a defence increase would require adding 3 to 3.5 percentage points to the main rate of Value Added Tax (VAT).
Middle East Conflict Compounds Economic Challenges
Miller highlighted that events in the Middle East, rather than the Spring Statement, represented the "big economic news" on Wednesday. Gas prices surged by more than 20 per cent in a single day and are up almost 80 per cent compared to the previous Friday. The stock market fell nearly 3 per cent, while borrowing costs rose sharply.
Miller cautioned: "If war in the Middle East drags on that will be unambiguously bad news for all of us, including for the Chancellor." She warned that higher oil and gas prices combined with increased economic uncertainty would likely drag on economic growth, reduce disposable incomes as inflation rises, and potentially lead to higher interest rates.
Record Tax Burden Could Stifle Growth
Adding to the economic concerns, a senior member of the budget watchdog warned that the UK's historically high tax burden could be stifling growth. David Miles, a member of the OBR's budget responsibility committee, noted at the Resolution Foundation's press conference that the tax burden was moving into "uncharted territory."
The tax burden - measured as government tax collection as a proportion of GDP - is forecast to reach 36.3 per cent in 2025/26, then rise successively to 38.5 per cent by 2030/31. This represents the highest level since records began in 1948.
Professor Miles stated: "Taxes relative to GDP are on a trajectory at the moment that looks like they may rise, relative to a couple of years ago, by about five percentage points in GDP. So that's a big increase in taxes. It would take the tax take of GDP in the UK probably higher than it's been since the end of the Second World War."
Unemployment Expected to Exceed Pandemic Levels
The Resolution Foundation also pointed out that unemployment is expected to surpass pandemic levels, with the OBR forecasting a peak of 5.33 per cent in the third quarter of 2026 - slightly higher than the 5.3 per cent peak recorded during the pandemic.
Despite these challenges, Chancellor Rachel Reeves expressed confidence that the government could outperform economic forecasts and cautioned against any "change of course." Her Spring Statement was notably devoid of new tax or spending policies as part of an attempt to maintain fiscal stability with just one major fiscal event each year.
Living Standards Outlook: Short-Term Relief, Long-Term Bleakness
Ruth Curtice, chief executive of the Resolution Foundation, provided a nuanced assessment of living standards: "The immediate economic outlook for Britain is highly uncertain, with yesterday's forecasts already looking out of date, while the living standards picture for the rest of the Parliament is very lopsided."
She explained that while the coming year is set to be decent for living standards - particularly for poorer families as wages and benefit support rise above inflation - a fresh energy price shock could undermine this progress. With wage growth expected to tail off, the living standards picture for the remainder of the parliamentary term appears bleak.
The Chancellor attempted to offer assurances about the potential impact of Middle East conflicts on oil and gas prices, arguing that the government was in a "better place" to handle such shocks than after the last general election. However, the combined warnings from Britain's most respected economic institutions suggest significant challenges ahead for the nation's economic recovery and fiscal stability.
