The U.K. economy is still stuck in low gear. The Office for Budget Responsibility (OBR) has halved its GDP growth forecast for 2025 from 2% to just 1%, forcing Finance Minister Rachel Reeves to make an emergency fiscal statement. In it, she unveiled plans to cut welfare spending and redirect funding toward defense and infrastructure projects.
The backdrop is one of deep economic uncertainty. The U.K. has endured a series of economic shocks—Brexit, the COVID-19 pandemic, the war in Ukraine, and rising global trade tensions—that have weakened consumer and business confidence.
Britain’s economic troubles are not isolated. Across Europe, growth is lagging, with Germany projected to grow just 0.4% and France 0.8%. But the U.S. tells a different story. It’s expected to grow by 2.2% in 2025, largely because of greater energy independence, more flexible labour markets, and the global dominance of the dollar.
The U.K. government now hopes to stimulate growth through defense investment, major infrastructure spending, and a 1.5 million-home building plan by 2029. Some of these, like new housing, are predicted to lift GDP by 0.4% over the next decade. But others—like increasing defense spending to 2.5% of GDP—are more controversial.
From an economics perspective, this is a real-life example of using expansionary fiscal policy to shift aggregate demand, but it also raises questions about the limitations of GDP as a measure of national welfare. Defense spending can increase output, but does it improve people’s lives?
Housebuilding, by contrast, is seen as more productive. It creates jobs across multiple sectors, boosts supply in an overheated property market, and potentially raises long-term tax revenue. However, the government faces political resistance from local communities over land use and greenbelt development.
For Economics students, the U.K.’s current situation illustrates the trade-offs governments face when designing fiscal policy, as well as the wider debates about the effectiveness of government intervention, and whether growth alone is enough to deliver prosperity.
THINK LIKE AN ECONOMIST!
Q1. Define the term fiscal policy.
Q2. Using an AD/AS diagram, explain how increased government spending on defense and housing could affect real output and employment in the U.K.
Q3. Evaluate the extent to which increasing government spending on housing and defense will lead to long-term economic growth in the U.K.
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