The dangerous driver behind Britain’s growth

Britain has become dangerously reliant on public spending to fuel the economy.

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.

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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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