Fall in UK GDP puts focus back on expectations of tax rises in autumn budget

The Guardian

11-07-2025

May's unexpected 0.1% decline in GDP will make depressing reading for Rachel Reeves before a tough budget in the autumn.
Stronger-than-expected growth would have helped to alleviate the squeeze on the public finances – but there is nothing in this latest data pointing to an upturn.
The 0.1% fall in May is marginal, but it follows a 0.3% contraction in April. The Office for National Statistics (ONS) has revised up March's growth, to 0.4% – but barring a bumper June, it looks like the economy may well have been going backwards in the second quarter of the year.
'May's downbeat outturn means a contraction in GDP across the second quarter looks a racing certainty,' said Suren Thiru of the Institute of Chartered Accountants in England and Wales.
The news comes just as Reeves and her team were daring to hope that business confidence was recovering after a tough few months despite the uncertain global backdrop.
It makes a rate cut from the Bank of England in August, which was already anticipated, look all but certain. It also appears to strengthen the arguments of the monetary policy committee's more dovish members, including Alan Taylor and Swati Dhingra, who have raised concerns of late about the weakness of the economy.
Taylor used a speech last week to suggest the MPC should make three more cuts in 2025 because of the 'deteriorating outlook'.
These monthly figures are frequently revised, but the ONS attributes May's contraction to a sharp fall in industrial production, which was down 0.9%. That was partly offset by a modest 0.1% increase in services output.
Within industrial production the decline was driven by a contraction in manufacturing, which was down 1%, after a 0.7% fall in April.
The manufacturing contraction included a very sharp 3.7% decline in vehicle manufacturing, after a 9.5% drop in April, which the ONS said reflected model changeovers by carmakers – as well as the effect of car tariffs, which have since been lifted under the trade deal struck with the US.
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At this point it is all but impossible to disentangle the economic impacts of Donald Trump's tariffs, and the increases in business taxes and the minimum wage that came in April.
However, fresh speculation about tax rises, after a U-turn on Reeves's £5bn welfare cuts package to head off a Commons defeat last week, risks dampening the mood for consumers and companies in the run-up to the autumn. The shadow chancellor Mel Stride's response to the GDP figures called this a 'ticking tax timebomb'.
Or as the chief economist of the Institute of Directors, Anna Leach, put it: 'Despite the welcome launch of a plethora of government strategies, and a spending review which stuck to the pre-set envelope, we're back worrying about tax rises in the forthcoming budget,' while underlying growth in the economy, for the moment, remains 'tepid and beset with risk'.