What is going on in the British economy?
What is going on in the British economy? You might be forgiven for wondering, if you had just looked at the economic statistics released at the end of this week.
On the one hand, we got the worst unemployment figures for some years. Overall unemployment is at a five-year high and youth unemployment rose to 14% (on top of an inactivity rate that is now nearly 30%). This seems to suggest an economy that is slowing significantly. And that, of course, is what last week’s overall economic growth figures told us too.
On the other, the public finance figures for January were notably better than expected – a £30bn surplus compared to last year’s £15bn – and there was good news on retail sales too, with a jump of 1.8% in January alone.
How are these apparently contradictory signals to be reconciled? Well, there is only one British economy, so a reconciliation must be possible. One must therefore go back to the root causes to explain the figures.
For the jobs market, it’s easy. Employers have already been hit by one round of jobs taxes, the increase in national insurance. The minimum wage continues to tick upwards faster than wage or productivity growth. And the prospect of the Employment Rights Act, now passed by Parliament and coming into force soon, has depressed confidence still further. It’s hardly surprising that some businesses, especially in the hard pressed hospitality sector, are giving up, and that others are simply not taking on new staff. Here, the cause and effect is clear.
On the other data, the causes are harder to assess. It’s certainly possible that, having emerged from the bleak end to 2025, there has been a little bounce back as – for better or worse – the November budget and the contents of the Employment Rights Act are at least now known. But it seems unlikely this represents a resumption of sustained growth – it’s more a release of some spending that was held back.
As for the public finances, the ONS themselves caveat the latest figures by pointing out that some tax due at the end of January is not actually received till February, and therefore that one should look at the two months together. So we must to some extent reserve judgement. Moreover, we can see that £7bn of the increased tax take comes from a jump in capital gains tax receipts, which in this case relates to sales of assets before April 2025. Here, the only plausible explanation is that people were selling more assets than expected, either because they were leaving the country, or because they feared increases in capital gains tax rates, or both. What we can confidently say is that this positive public finances picture has nothing to do with the current performance of the economy.
So in fact the picture can be reconciled. The statistics all reveal, entirely consistently, an economy that has been slowing for at least the last year, and one in which economic actors consistently expect government policy to get worse not better and tailor their own behaviour accordingly. Until that changes, we can’t expect growth and incomes to start improving on anything like a sustainable basis.
Lord Frost
Director General Institute of Economic Affairs