The dangerous driver behind Britain's growth
Growth slowed in the three months to June, with the economy expanding by 0.3pc compared with 0.7pc in the first quarter of 2025.
However, it is still better than the 0.1pc expected by analysts and a figure that will be welcomed by Rachel Reeves, with GDP per person – a proxy for living standards – also seeing growth in the first half of this year.
However, scratch below the surface and it's clear that the factors behind this growth are unsustainable.
The Office for National Statistics (ONS) said the expansion over the past quarter was driven by 'government consumption'. This includes health and defence, as Labour pours billions of pounds into the NHS and ramps up its pledge to spend more on the military.
Statisticians added that public sector administration costs had also climbed in the three months to June. By contrast, business investment declined and household spending barely grew.
At the same time, private sector businesses saw a massive increase in costs – with the Chancellor's record National Insurance raid on employers coming alongside a big jump in the minimum wage at the start of April.
Reeves's decision to boost public spending for the rest of the parliament while taxing private sector businesses will only cement these trends.
The Chancellor hailed the 'strong start to the year', adding: 'I know that the British economy has the key ingredients for success but has felt stuck for too long.'
However, Anna Leach, chief economist at the Institute of Directors, said: 'It is good to see a stronger growth outturn than many feared.
'But it is striking that momentum is coming from the public sector, with consumer spending slowing and business investment contracting. Private sector growth is being held back by both global and domestic policy uncertainty, with speculation over forthcoming tax increases adding to the headwinds.'
With this speculation of further tax rises likely to create more uncertainty and hold back vital investment, the Chancellor faces becoming even more reliant on the public sector to fuel growth.
The trend didn't just start under Labour. The Bank of England has previously highlighted that public sector output has been driving growth for almost two years now while private sector growth has lagged behind.
This is dangerous for two reasons. Public sector productivity is barely above levels seen in 1997, meaning that despite all the technological advances over the past few decades, for every £1 spent on schools, hospitals and teachers, it still gets about the same amount out.
By contrast, output per hour in the private sector is about 32pc higher than its 1997 level, which is still not much to celebrate. Productivity tells us how much the economy can grow without generating too much inflation. When productivity grows, so do company profits and staff wages. This leads to stronger growth, a bigger economy, rising tax revenues and smaller borrowing bills.
As Andrew Bailey, the Governor of the Bank of England, put it earlier this year: 'It is fair to say we have seen an increase in public sector employment. We haven't seen a commensurate increase in measured public sector output.'
Measurement issues play a role. After all, it is difficult to quantify what an hour of teaching is worth.
Britain's older and sicker population also suggests the state will only get bigger, relying on ever higher taxes on the private sector to pay for it all.
Analysis by the Resolution Foundation, a think tank, shows that Reeves has put health spending on course to gobble up half of all the money spent on day-to-day services by the end of the decade. This is up from a third in 2010 and roughly a quarter in 1999.
With public sector employment on the rise and demands for ever higher pay getting louder, there is a risk that the trend of dire public sector productivity continues.
For this reason, Reeves's allies say she will focus on driving up productivity in the Budget. She needs to if Labour is to achieve a pledge of raising living standards across the country.
ONS data showed real GDP per head grew by 0.2pc in the three months to July, following growth of 0.6pc in the first quarter. The UK is also holding its own on the international stage, with overall growth of 0.3pc compared to a contraction of 0.1pc in Germany and Italy, two of Europe's biggest economies.
However, separate analysis by the World Bank showed Britain's living standards fell behind those in Italy for the first time since 2001 in another sign that the UK's status as a rich country is being eroded.
It's not all gloomy, with net trade confounding all expectations by contributing positively to growth.
The UK has emerged relatively unscathed from Donald Trump's trade war, with exports actually rising in the second quarter by 1.6pc. Pharmaceutical manufacturing also ramped up over the quarter, with the sector still fearful of being hit by higher tariffs.
Sanjay Raja at Deutsche Bank said the strong momentum at the end of the quarter suggested annual growth could be revised up in 'a welcome sign for the Chancellor and the Office for Budget Responsibility'.
However, he also cautioned that a strong private sector was the key to sustainable growth.
'To be sure, the economy is growing,' Raja said. 'Positive momentum is brewing. But animal spirits remain tepid.
While the Chancellor is poised to focus her Budget on improving productivity – a very welcome focus for the UK – Number 11 should also prioritise lifting household and business confidence to sustain the UK's outperformance.'
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The Guardian
21 minutes ago
- The Guardian
How can England possibly be running out of water?
During the drought of 2022, London came perilously close to running out of water. Water companies and the government prayed desperately for rain as reservoirs ran low and the groundwater was slowly drained off. Contingency plans were drafted to ban businesses from using water; hotel swimming pools would have been drained, ponds allowed to dry up, offices to go uncleaned. If the lack of rainfall had continued for another year, it was possible that taps could have run dry. That, however, was just a taster of what could come down the line. On Tuesday, the government announced a 'nationally significant' water shortage in England, which means the whole country is at risk of running out if the dry weather continues. People across England are already banned from using hosepipes, with more restrictions probable over coming months. The UK Centre for Ecology and Hydrology (UKCEH), an independent research institute, has warned of exceptionally low river flows. Reservoirs are also at extremely low levels and groundwater is dwindling. Droughts are generally two-year events. A year of dry weather means water supplies are running out – that is what is happening now. Things really come to a head if the following year does not bring above average rainfall. That is when the shortages start to bite, with farmers unable to irrigate and households and businesses hit with sweeping restrictions. With reservoirs at record lows and stream flows exceptionally low, England is desperate for rain. Forecasts indicate that by 2055 England's public water supply could be short by 5bn litres a day without urgent action to future-proof resources, the equivalent to more than a third of the supplies available today. The effect on the economy will be profoundly negative. The thinktank Public First has estimated that the economic cost of water scarcity could be £8.5bn over this parliament. So how on earth did famously rainswept England, notorious the world over for being green and wet with our national symbol pretty much a furled umbrella, come to this? Britain's geology and climate means there should be plenty of water. Underground in the south of England the rock is made of chalk, which is very soft and porous. These layers of rock filter rainwater into some of the cleanest water in the world, collecting in huge aquifers that have been tapped by local residents for centuries. Water companies now use those aquifers to provide the majority of the drinking water in some parts of the south. Further north, the rock underfoot is harder; sandstone and limestone, so lacking the benefits of the chalk aquifer. But it tends to receive more rainfall than the south, so there has generally been plentiful water from the skies to fill the reservoirs on which the northern water companies rely. There are also the rivers that crisscross the country, which (when clean) include gin-clear chalk streams buzzing with mayflies and thronging with salmon and other fish. The UK is one of the rainier places in Europe. Some areas are wetter than others. In England, the Lake District generally receives an average of 2,000mm of rainfall a year, while in parts of the south-east it is as low as 700mm. Perhaps it is because the country has always had such rich resources, that they have been taken for granted. Running out of water has never really been in question. But with population growth and climate breakdown, this is starting to look like folly. It was in the 17th century that the New River Company began piping water into London's homes from the springs in nearby Hertfordshire for the very rich. Slowly the technology began to spread and grow in popularity. Over the next decades, England's population would rise dramatically and the water systems of its rapidly growing cities would come under increasing stress. When the Great Stink hit London in 1858 during a heatwave, the civil engineer Joseph Bazalgette had already been commissioned to draw up plans to urgently update the city's sewage system. Known for his tirelessness, Bazalgette checked every connection himself, making thousands upon thousands of notes, and saved many lives as the system diverted sewage away from the city and into the Thames estuary. Later, treatment centres were added to purify the water. Today, consumers are used to having water coming out of a tap and they want to use a lot of it. Future generations, who will be dealing with long, dry summers, would probably be shocked at the profligate way clean tap water was used to flush toilets, water gardens and run washing machines. UK households use more water, mostly on showering and bathing, than other comparable European countries, at about 150 litres a day per capita. For France the average is 128, Germany 122 and Spain 120 (although in Italy its 243 litres a day). And the waste starts long before it gets to people's taps. Water companies in England and Wales lose about 1tn litres of water through leaky pipes each year. The industry has said that about 20% of all treated water is lost to leaks. The water firms have pledged to halve leakages by 2050. Meanwhile, the annual pipe replacement rate is 0.05% a year across all water companies: much of the sewage system in London, for example, has not been significantly updated since Bazalgette and his colleagues installed it in the 19th century. No new reservoir has been built in 30 years despite significant population growth and climate breakdown meaning longer, drier summers during which the country desperately needs to store water. The reservoirs England does have are at their lowest levels in at least a decade, just 67.7% full on average. According to Dr Wilson Chan, a hydroclimatologist at UKCEH, 'above average rainfall over several months is needed to ease pressures on water resources'. Was it the privatisation of the water and sewerage industry in 1989 that has led to this situation? England's water system has been widely criticised, and privatisation has been blamed for a lack of investment in infrastructure. Some say this is owing to the water companies paying out dividends rather than using the money raised by customer bills solely for investment in infrastructure; others blame a privatised regulated monopoly system that has prioritised low customer bills over investment. Experts have also pointed to the regulatory system. Water company drought plans compel firms to follow a series of steps before they can increase abstraction, taking more water from reservoirs, rivers and the ground to supply customers, beginning with reducing consumption (a hosepipe ban). 'Water companies must now take action to follow their drought plans – I will hold them to account if they delay,' says the water minister, Emma Hardy. 'We face a growing water shortage in the next decade.' But water companies believe that people hate being told to reduce their water consumption, so avoid hosepipe bans as much as possible. It does not help that bans may also lead to customers giving low satisfaction marks for their company, which are then taken into account by the regulator. The end result of these incentives; unsustainably high levels of abstraction from the natural environment, most of which will not be replaced by rain on the same timescale. Stores of water such as fossil aquifers and chalk streams recharge over centuries. The Environment Agency (EA) assess that 15% of surface water bodies and 27% of groundwater bodies in England have unsustainable levels of abstraction. 'We are calling on everyone to play their part and help reduce the pressure on our water environment,' says Helen Wakeham, the EA's director of water and chair of the National Drought Group. 'Water companies must continue to quickly fix leaks and lead the way in saving water.' This is not just a management problem. As climate breakdown accelerates, rainfall patterns are changing fast, and water will increasingly become less available at certain times of year. As Sir David King, a former UK chief scientific adviser who chairs the Climate Crisis Advisory Group, says: 'Drought in England is no longer a warning. It is a clear signal that climate collapse is unravelling our water, food and natural systems right now. 'This crisis demands a fundamental shift that places real value on our planet and environment, invests in nature, restores water cycles and transforms how we use every drop. If we rise to this moment we can turn crisis into opportunity, delivering economic resilience, ecological renewal and climate leadership.' The UK is not the only country that is already struggling to deal with changing weather patterns. Almost half of Europe is in drought, with wildfires tearing across the continent and farmers struggling to grow crops. Many of the economies of Southern Europe are dependent on sunny weather that has historically made the region the perfect place to grow vegetables for export. Scientists are concerned that farming in certain southern European countries will become less and less viable. More than 90 million people in eastern and southern Africa are facing extreme hunger after record-breaking drought across many areas has led to widespread crop failures and the death of livestock. As the impacts of the climate crisis unfurl around the world, is the UK government awake to the scale of the problem? Nine new reservoirs are in the pipeline to be built before 2050, while there are consultations on reducing demand for water. But this may be too little, too late; many housing developments are on pause because of water scarcity. The first new reservoir planned for Abingdon in Oxfordshire is sited in the same place as the government's new datacentre zone, leading to fears the water will be used to cool servers rather than serve customers in one of the most water-stressed areas of the UK. Green homes experts have said government building codes for new housing should include rainwater harvesting for internal use such as in lavatories and washing machines. People with gardens could use a water butt in summer, so that clean tap water is not being pumped through a hose into garden plants. Reducing time in the shower by a minute can save water, says Waterwise, while green building groups recommend the use of water-saving shower heads. A recent government commissioned report recommends smart water meters ate installed nationally, so households who use sprinklers and fill swimming pools are charged more than those who are more frugal with their use. More broadly, farmers could build reservoirs on their land to reduce the need for irrigation. Nature-based solutions could be used too, such as releasing beavers that create dams and hold water in the system, or restoring wetlands. 'We need to build more resilience into our rivers and their catchment areas with nature-based solutions at scale, such as healthy soils that allow water to filter into the ground and not rush off taking the soil with it; riverside tree planting to provide shade and further slow the flow of water; wetlands to store and slowly release water, and rewiggling streams to raise the water table and purify pollutants,' says Mark Lloyd, the chief executive of the Rivers Trust. 'We also need to finally implement the use of rainwater rather than drinking water where we can, such as car washing, gardening, washing pets, filling paddling pools and flushing the loo. Other water-stressed countries have used this approach for decades and we need to join that party.'
Sky News
37 minutes ago
- Sky News
Starmer to meet European leaders for 'coalition of the willing' talks on Ukraine
European leaders who make up the 'coalition of the willing' are set to hold a conference call on Sunday - ahead of crunch talks between Donald Trump and Ukraine's Volodymyr Zelenskyy next week. The coalition - co-chaired by Sir Keir Starmer, France's President Emmanuel Macron and Germany's Chancellor Friedrich Merz - has the aim of bringing countries together to protect a peace deal in Ukraine. Top of the agenda at Sunday's meeting will be securing a concrete commitment from Mr Trump on a security guarantee that would act as a powerful backstop in any Russia-Ukraine peacekeeping arrangement. European leaders seemed buoyed by the US president's most recent hints on the subject, in the knowledge that US military might is likely to deter Vladimir Putin from advancing in the future. They will also discuss how to bring Mr Zelenskyy into talks after Mr Trump and Mr Putin's Alaska meeting saw him left out in the cold. In coordinated statements, European leaders said Mr Zelenskyy must play a greater role in future talks, and that peace cannot be achieved without him. The hard bit will be to persuade the unpredictable US administration to change its approach, something that has proved almost impossible in the past. 5:55 When Mr Trump re-entered the White House and made it clear the US would no longer provide a blank cheque to protect peace in Europe, others decided they had to step up, and the 'coalition of the willing' was thrown together in March. Since then, information about the allied peacekeeping effort has been patchy, but we know it includes over 30 countries, which have been asked to pledge whatever military support they can, including troops. 2:21 What has been forthcoming from the group though, has been consistent attempts to use their limited leverage to put pressure on the US. That will continue ahead of crunch talks between Mr Trump and Mr Zelenskyy, which are set to take place in Washington on Monday.
The Guardian
40 minutes ago
- The Guardian
A UK headline wealth tax? It may be simpler to put up existing taxes
Pressure to go further on wealth taxes – by creating new modes of clawing at hoards of hard-to-reach cash – is mounting. For starters, the fiscal picture is looking fairly bleak, with economists estimating that Rachel Reeves must raise £20bn – or even as much as £50bn – to meet her goal of balancing day-to-day spending against the revenue raised from taxation. On the government backbenches, meanwhile, MPs want the chancellor to squeeze the richest in society harder. They even put forward an early day motion last month calling for a 2% annual tax on individual assets over £10m. Yet introducing these kinds of taxes is often not straightforward, with the behaviour of the wealthy being hard to monitor and harder still to predict. The first significant problem is working out where the assets are and who holds them. That has always been difficult and has become even more challenging after one of the most important economic surveys, the household wealth data series, was suspended by the Office for National Statistics because of its low quality. The upshot is that HMRC simply does not know how many millionaires or billionaires there are in the UK. Without reliable figures, it is extremely hard to write policies, cost them and administer them. There is also a battle to be had with an 'old guard with set views' in Whitehall. Whitehall sources paint a picture of a Treasury led by figures influenced by economists whose thinking was prominent at Oxford University in the 1980s and 90s – such as James Mirrlees, Christophe Chamley and Tony Atkinson – leading to something of an orthodox view. In a nutshell, that position is that if you tax capital too much, it will stop investment and hamper growth. Or, in Chamley's words: 'Tax rate on capital income tends to zero in the long run.'. Since this era, the debate within economics has become more nuanced. A growing body of research suggests that some taxation on capital, even at relatively high rates, could lead to greater investment. As it becomes less attractive to hoard wealth because of taxation, risk appetites would then increase in pursuit of higher returns. You might be less tempted to keep your money in a vanilla savings account that can be taxed hard and easily if you can get a much better rate of return – even with a bit more risk – elsewhere. Treasury insiders argue that Reeves has followed the more modern logic, having already taken steps to widen the scope of inheritance and capital gains tax (IHT and CGT). They posit that her reluctance to pursue a headline wealth tax does not mean she has pulled her punches when it comes to taxing wealth. Hostile backbenchers, on the other hand, suggest she follows the old orthodoxy too closely. They often cite her decision to go for relatively small changes in the amounts of tax paid via CGT, rather than bring it more closely in line with income tax at the last budget, which also upset more senior political colleagues. What the debate about how to handle changes to IHT (which have been fiercely opposed by farmers) or CGT illustrates is that if the government really wants to tax wealth more effectively then it has all kinds of ways to do so before opting for a politically – and potentially economically – sensitive route with a headline wealth tax. Yet even changing existing mechanisms might not be easy, when the UK already has one of the highest rates of tax on property and wealth among developed economies, according to the Organisation for Economic Co-operation and Development. Sign up to Business Today Get set for the working day – we'll point you to all the business news and analysis you need every morning after newsletter promotion Political pressure may make it harder to maintain a more gradualist approach, however. Figures on the left of the Labour parliamentary party are attracted to totemic wealth taxes of the kind introduced in Spain – its so-called solidarity tax – and Switzerland. They see it as part of showing a commitment to rebalancing the economy. Reeves is critical of international examples, saying that Switzerland does not have IHT, and that Spain's wealth tax is so riddled with exemptions that it raises too little money. Some developed economies that had comparable wealth taxes have dropped them, too. 'We have inheritance tax. We have capital gains. We've just got rid of the non-dom tax status that doesn't exist anymore in our tax system. So we do have taxes that tax the wealthy,' Reeves said in a recent interview with LBC. Other measures that go further are not yet proven to work, she claims, saying that those who 'come up with simple solutions' must do more to 'explain exactly how it would work, whether it's an ongoing tax, what it would do to tax avoidance, what it would do about people moving or changing the way that their wealth is stored'. Economists argue that the government should focus its energies on raising existing taxes, such as equalising CGT with income tax, for example, or changing gifting rules around IHT first, rather than introduce a novel wealth tax. The Treasury is already examining gifting rules among other possible IHT changes. Yet while Reeves might agree with some of these arguments, it's less clear whether her cabinet colleagues will tolerate a slow and steady approach, particularly if the fiscal picture sours.
