The UK’s growth problem runs deeper than Trump’s trade war

23 April 2025, 14:12

Yesterday, the IMF downgraded the UK’s economic growth forecast by a third from 1.6% to 1.1%.

Trump’s trade war is the main reason cited by both the IMF and the UK Government for this, but while tariffs will certainly be damaging, they are not the only reason for the country’s economic malaise.

The Government spent last summer talking down the UK economy. In doing so, it undermined business and consumer confidence – meaning that households and firms were less likely to spend and invest.

Last Autumn’s Budget then placed a heavier burden on firms by hiking employers’ National Insurance Contributions and significantly increasing the Minimum Wage. This, combined with the forthcoming Employment Rights legislation, means that businesses are facing additional costs and so will have no choice but to hire fewer workers, invest less, and raise prices for consumers.

These decisions are contrary to the lessons drawn from Policy Exchange’s recent report, ‘Economic Transformation: Lessons from History’, which shows that for a country to grow its economy, it generally needs to lower taxes, increase investment, and embrace free markets.

However, there are also deep-seated structural issues facing the UK economy, which is why it has experienced almost two decades of very low economic growth. The country’s restrictive planning system makes it difficult to build enough new homes in and around our major towns and cities. This is having a detrimental impact on productivity as young people are unable to take up jobs that match their skills.

Moreover, the UK faces the highest industrial energy prices in the developed world. The overly-rapid push towards Net Zero means that firms are facing crippling energy bills and so they have less money to invest in productivity enhancing measures – and in some cases, including that of heavy industries such as steel have been forced to close down or have been bailed out by the taxpayer.

The economy growing more slowly than it should is much more than lines on a chart. It means that businesses don’t expand, people lose their jobs or can’t find work in the first place, and living standards are lower than they would have otherwise been. In short, we are all much poorer as a result.

Slow growth is also bad news for the public finances. Lower profits and wages combined with more people being out of work mean that the Government has less revenue from taxes. As a result, it has to borrow even more money in order to fund its spending commitments – further driving up interest payments on our debt, which hit £4.3bn last month alone.

Low growth and high borrowing are unacceptable and unsustainable. The Government needs to urgently lower taxes, cut red tape, and take a more proportionate approach towards Net Zero. What is more, while its commitment to building more homes and fast-tracking permission for new nuclear plants is welcome, it needs to go further and faster. This is the only way to reverse the decline and improve living standards.

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Ben Ramanauskas is a Senior Research Fellow in Economics at Policy Exchange

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