Fact check: Labour claims the economy ‘is in a better place'
Labour has justified its U-turn on winter fuel payments by claiming the economy 'is in a better place' and the public finances are on a 'stronger footing', according to James Murray, a Treasury minister. Is he correct?
The main statistic backing the government's claim that the economy has turned a corner is the most recent set of official growth figures. Gross domestic product — a broad measure of the size of the economy — expanded by 0.7 per cent in the first three months of the year, exceeding forecasts of about 0.4 per cent and the fastest acceleration in 12 months. It also meant the UK was the fastest-growing economy in the G7 at the start of 2025.
Although the growth momentum is expected to peter out over the course of the year, the strong first quarter has led City forecasters and the International Monetary Fund to modestly upgrade their annual growth forecast from 1 per cent to about 1.1-1.2 per cent. The economy expanded by 1.1 per cent last year, so growth is likely to at least match, rather than far outstrip last year's performance.
Labour will also take comfort in an improvement in the UK's GDP per capita figures, which is a more accurate measure of living standards. Growth divided by the population rose by 0.5 per cent in the first quarter, after contracting for two consecutive quarters prior.
One of the most important economic indicators for living standards and the sustainability of the public finances is productivity growth. This is a broad measure that combines the efficiency of worker output and investment across the economy.
The UK's dismal productivity performance since the global financial crisis hasn't turned around since Labour won the election. Productivity was 0.2 per cent lower in the first quarter of the year compared with the same period in 2024.
Productivity in the private sector also contracted by a surprising 0.7 per cent last year, pushing it to below pre-pandemic levels and nearly 2 per cent lower than before the financial crisis in 2008. In the public sector, productivity has contracted for the past two years.
Along with productivity growth, lifting business investment will be decisive in defining the government's economic record in this parliament. Private sector investment enjoyed a strong start to the year, expanding by 5.9 per cent in the first quarter compared with the end of 2024, and is 8.1 per cent stronger compared with a year ago.
However, the figures are likely to have been distorted by a sharp rise in manufacturing investment, as companies rushed to stockpile materials before President Trump's tariffs announcement on April 2.
Public and private sector investment is vital to raise innovation, create jobs and ultimately boost productivity. The UK's total rate of investment has been the worst in the G7 for 24 out of the past 30 years, according to the Institute for Public Policy Research.
After more than a year of steadily falling inflation, the pace of price rises has started accelerating again this spring. Annual consumer price inflation rose to 3.4 per cent in April, dragged higher by energy and utility costs. The Bank of England does not expect inflation to fall back to its 2 per cent target until the end of next year.
Figures released on Tuesday showed that the labour market is in the grip of a pronounced slowdown. Unemployment has hit a four-year high of 4.6 per cent, and the number of payrolled employees contracted by 55,000 in the three months to April. A first estimate for May showed a 109,000 decline in jobs, which if confirmed would be the worst month since the height of the pandemic in April 2022.
Labour has been handed some mixed news on the state of the public finances. The Office for National Statistics lowered its borrowing estimate for the last fiscal year by £3.7 billion to £148.3 billion ending in March 2025, but this figure still overshot the £137.3 billion forecast made by the government's independent fiscal watchdog, the Office for Budget Responsibility.
Monthly borrowing data has also consistently come in above forecasts as the government's coffers have suffered from lower-than-expected tax revenues. On the expenditure side, spending on public sector pay deals and welfare has been growing too fast for comfort for the chancellor.
Financial market conditions have also turned against the government this year. Investors have driven up the UK's borrowing costs, as reflected by yields on sovereign debt. Since Rachel Reeves's spring statement in late March, higher gilt yields have blown a £5 billion hole in the chancellor's £9.9 billion buffer to meet her main fiscal rule.
Labour's difficulty in balancing the books over the course of the parliament has stoked speculation that Reeves will be forced into more tax rises or spending cuts at her autumn budget.
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