Rachel Reeves is heading for a major blow in the coming days as forecasters say figures will show Britain’s economy shrank in the second quarter of 2025. Despite repeated pledges to get the economy growing to fund her spending splurge, the S&P credit rating agency has predicted that Office for Budget Responsibility figures in the coming days will confirm the opposite.
S&P calculates that the UK economy will have shrunk by 0.3% from March to June, unwinding some of the modest 0.7% growth seen in the first quarter of the year. It will pile even more pressure on the Chancellor to break Labour’s manifesto pledges in her Budget this autumn and hike taxes to fund her spending plans. Much of the economic chaos is being pinned on Donald Trump’s tariff war, with the Government being warned that Sir Keir Starmer’s new trade deal with America will not be enough to mitigate the wider fallout.
The US president’s “liberation day” tariffs were set to knock 0.2% off GDP, although the forecaster said the Prime Minister’s trade deal halved this to just 0.1%.
However, Ms Reeves’s other policies, including the rise in National Insurance for employers, have hampered growth. The chaos in the Middle East is also set to cause a further rise in inflation.
While Ms Reeves can blame events overseas for damaging her growth prospects, she has been repeatedly warned about overspending and not leaving enough fiscal headroom in the event of unexpected global turmoil.
S&P said: “The agreement still leaves tariffs higher than they were before, at 10% for most products.
“Even if the UK is slightly better off in terms of trade with the US than other countries, UK-US trade will still be lower than it would have been under the tariffs before April 2.”
Paul Johnson, director of the Institute for Fiscal Studies, said Ms Reeves is now “inevitably” heading for tax hikes in order to fund her spending promises.
He said on social media site X: “Another £30billion on defence. U-turn on winter fuel. Rebellion on plans which just slightly slow huge increases in spending on disability benefits.
“If spending goes only one way, then so, inevitably, will tax. Historic increases already this decade. Looks like a lot more to come.”
An ongoing row about welfare cuts is also a major headache for the beleaguered Chancellor as she seeks to make big savings from the benefits bill.
More than 100 Labour MPs are now backing an amendment that would effectively kill the changes and create a major black hole in Ms Reeves’s accounts.
The Chancellor has warned rebels that voting down the cuts will devastate the country’s finances.
The Confederation of British Industry (CBI) has also slammed Ms Reeves’s programme, saying that it is making life impossible for for small and medium-sized businesses.
Ben Jones, of the CBI, said: “The UK’s manufacturing sector is under significant pressure, contending with high energy costs, rising labour costs, pervasive skills shortages, and a volatile global economic environment.”
