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Opinion

Why Rachel Reeves’ ‘economic growth’ announcement doesn’t add up

05 Feb 2025 4 minute read
Chancellor of the Exchequer Rachel Reeves. Photo Peter Byrne/PA Wire

Professor John Ball

In her recent “economic growth” announcement the Chancellor made much of proposed investment, especially the expansion of Heathrow and the new tunnel under the Thames.

Official figures have shown little or no economic growth since Labour took office in July, with Ms Reeves’ Budget imposing national insurance hikes on businesses, hitting confidence and potentially costing 50,000 jobs.

But the Chancellor’s “growth” speech at a medical equipment firm in Oxfordshire last month gave a notably upbeat assessment of the UK’s economic prospects saying the Government had “begun to turn things around”.

She highlighted the long-delayed Heathrow expansion project as an indication of the problems that had beset the UK economy and used her speech to defend the decisions she took in her first Budget, saying that taking the right decisions for the economy “does not always mean taking the easy decisions”.

Other schemes announced by Ms Reeves included:

  • Plans for the Oxford-Cambridge corridor, which she said could become “Europe’s Silicon Valley” and add £78 billion to the UK’s economy by 2035.
  • New reservoirs will be built near Abingdon in Oxfordshire and in the Fens near Cambridge. They will be among nine new reservoirs built as the Government has agreed for water companies to invest £7.9 billion to improve infrastructure.
  • Funding for the East-West rail link joining Oxford, Cambridge and towns like Bedford and Milton Keynes that sit between them will be confirmed, as well as upgrades to the A428 road.
  • A new Cambridge cancer research hospital will be prioritised as part of the new hospitals programme.
  • Oxford will get a growth commission, similar to one set up in Cambridge, aimed at helping the city and surrounding region to grow its economy.
  • The UK Government will back the reopening of Doncaster Sheffield Airport as South Yorkshire Airport City.
  • A £65 million investment by the National Wealth Fund in expanding electric vehicle charging infrastructure.

This was presented, together with telephone number amounts of money.

Multipliers

Big numbers make big headlines, but once the schemes announced are looked at carefully, the Chancellor’s lack of understanding of what drives economic growth becomes clear.

Economic growth relies upon what economists call multipliers; that is the amount of additional spending arising from the initial investment in a sort of ‘chain reaction.’

There are several theoretical definitions of what constitutes a multiplier, and the concept is invariably associated with the entire economy. However, for investment to have the extra required effect, it is also recognised that multipliers apply locally.

There are in practice two multipliers: long term and short term and are fundamentally different in the effect they have on the economy.

The long-term multiplier is self-evident. The investment provides an initial economic stimulus, but the real positive effect is the on-going spend that spills over into the local economy. A new airport is an example, once completed it has a substantial local effect through the supply of all manner of goods and services.

The difference with the latest announcement on Heathrow is that the airport already exists, as does its supply chain. However, the investment would result in a limited multiplier effect.

Limited effect

The short-term multiplier has almost no on-going effect. The proposed tunnel will attract contractors and suppliers to the contractors but once complete there is no extra spending. It may have an extremely limited effect in say, shorter journey times, but that is it.

The point of this? Politicians of all colours enjoy the opportunity, whenever it comes along, to announce a grand investment scheme costing big numbers.

What they should do is ask about the future potential of the investment.

The two schemes costing together £23billion announced by the Chancelor will not result in any improvement of the UK economy. How much does she really know about economics?


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Nigel
Nigel
1 day ago

Does the UK need a hub airport? What value do people flying in just to fly straight out add to UK Plc other than airline profits and carbon footprints? We’re told that Heathrow needs to grow to accommodate flights to new markets which will support growth. So why wait decades for this when slots can be freed up by taxing the transit passengers out of existence.

John
John
1 day ago
Reply to  Nigel

I’m not pro expansion, but the cost of tickets flying in to or out of London would go up without transit passengers and the range of destinations would decrease

Nigel
Nigel
9 hours ago
Reply to  John

That may not be the case because there are no spare slots and other operators can’t access the airport. That means existing operators can inflate their prices because competition is being suppressed.

Dewi
Dewi
1 day ago

Interesting read. Let’s be honest—the UK has been sinking ever since the Grocer’s Daughter, with her Dickensian workhouse grip on economics, decided to deindustrialise these densely populated islands. Britain became crowded because of industry, and now the very reason for its existence has disappeared. Labour won’t reindustrialise the country—we’ll never catch up. It takes us decades and billions just to build a few miles of high-speed rail, while in China, they slap it together overnight for the price of a round of drinks. The only real hope? Welsh independence, rejoining the EU, and copying our Celtic cousins by turning Wales… Read more »

Steffan ap Huw
Steffan ap Huw
16 hours ago
Reply to  Dewi

a) China’s industrialisation and economic expansion are not very good benchmarks: we are all aware of the corner-cutting, standards-ignoring, exploitative practices involved. It’s more or less a Potemkin village. China will happily bulldoze your home in the name of progress, whereas here, there are reams of red tape in place to prevent that happening to you. Be thankful. b) Britain (like most other nations) is run for profit, and not for the people. So, if stuff can be made for cheaper elsewhere, we shouldn’t expect to be able to maintain a competitive edge, or to be able to maintain an… Read more »

Mark
Mark
8 hours ago
Reply to  Dewi

You do realise that EU rules implemented last year fix minimum corporation tax at 15%? And that the EU has previously discussed setting a minimum corporation tax of 30% (though this is not being implemented)? And that the European Commission has been dragging Ireland through the courts for playing fast and loose with tax credits to keep Apple et al in Dublin? And dragging Luxembourg through the courts for not taxing Amazon enough? And that the EU also sets a minimum VAT rate for most products that all member states must comply with. You are right, Welsh independence would allow… Read more »

Dewi
Dewi
3 hours ago
Reply to  Mark

I’m talking broad strokes here—Wales isn’t going independent next week, is it? We won’t wake up to border posts in Newport and a dragon on the passport by Friday. But maybe we’ll go full Swiss mode—low taxes, neutral vibes, and slipping into the Single Market and Schengen like a rugby player sidestepping a tackle. One thing’s for certain, though: those crafty Irish will find a way to outmanoeuvre and hoodwink Brussels. They always do—probably with a pint in one hand and an EU grant in the other. And while we’re at it, let’s rid ourselves of colonial thinking and start… Read more »

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