New report claims Reeves Budget will fuel UK GDP growth of 1.5% this year

A new report published today (February 12) by economic experts will hearten Chancellor Rachel Reeves who has been under sustained fire following her Autumn Budget which many claim will not encourage the growth strategy at the heart of the new Labour government.

The latest quarterly UK Economic Outlook by the National Institute of Economic and Social Research (NIESR) claims the UK could be the third fastest growing economy in the G7 this year, with GDP projected to increase by 1.5% in 2025.

It says this growth will be driven mainly by the fiscal expansion announced in the October Budget, which will start having a tangible effect during the course of 2025, coupled with continued growth in business investment.

The increase in GDP, though, won’t translate immediately into higher living standards for every household.

Projections imply that the living standards of the bottom 40% of households will not return to pre-2022 levels before the end of 2027.

While real personal disposable income is projected to grow by 1.9% in 2025 and one per cent in 2026, this will not compensate for the fall in living standards that happened between 2022 and 2024.

The NIESR says it expects the Budget to have some positive effect on lower income households – those in the second-income decile will be better off by about £2,400 in 2025-26 thanks to the substantial increases in the National Minimum Wage (NMW) and the National Living Wage (NLW).

For households earning between approximately £16,000 and £24,000, living standards will be about 12.5% higher relative to the “no uplift” counterfactual.

For those households, the rise in NMW and NLW will also translate into higher labour market participation and lower unemployment rates. Projected inactivity is lower by about three percentage points and projected unemployment rates are lower by about 1.5 percentage points than would have been the case without higher NNW/NLW rates.

As for inflation the charity forecast it to rise to 3.2% in January, due to base effects, before falling slowly back to target, and to average 2.4% in 2025.

Persistent wage growth this year, together with an expansionary fiscal policy and exchange rate depreciation, will all act to limit the scope for monetary loosening this year. The NIESR anticipates just one further rate cut in 2025.

It adds that the Government looks likely to be on track to meet its new fiscal rules, but it will have no headroom by the end of the Parliament to absorb any shocks or boost public investment.

Even a modest increase in borrowing costs could push the projected balanced budget into deficit by the end of the Parliament, thereby breaking the ‘stability rule.’

To avoid that, the NIESR recommends that the Government considers changing its commitment around taxation to provide a buffer that can absorb cyclical economic shocks.

Prof Stephen Millard, NIESR Interim Director, said: “Although consumer and business confidence fell at the back end of last year leading to a flattening of GDP, we expect 2025 to be better as the large increase in government spending announced in the October Budget kicks in.

“However, this will only be a temporary boost. Much more important for long-run growth will be increased private and public investment and the planning reform needed to enable this to happen.”

Prof Adrian Pabst, Deputy Director for Public Policy, said: “Higher economic growth and continued real wage growth will provide a welcome relief for millions of households who have seen their living standards decline in recent years.

“But the recovery is slow, and more should be done to help the poorest 20% of households, for example by bringing forward the uprating of personal income tax thresholds in line with inflation scheduled for April 2028.”

He said ‘left behind’ regions of the country that are held back by deep gaps in housing and transport connectivity need more public and private investment to catch up, otherwise regional inequalities will become even more entrenched.

The NIESR is Britain’s longest established independent research institute, founded in 1938 by a group of major social and economic reformers, including John Maynard Keynes and William Beveridge.