How quickly could Rachel Reeves' new plans boost growth?

UK Chancellor Rachel Reeves stated on Wednesday that "economic growth is the government's top priority," and unveiled a series of proposals aimed at boosting the UK economy. Whether these proposals can rapidly stimulate economic growth has drawn widespread attention.

Critics argue that some projects, such as the expansion of Heathrow Airport, will not have significant effects in the short term. The BBC's Reality Check team has examined some key data and claims to assess the true state of the UK's economic growth.

The latest official figures show that the UK's gross domestic product (GDP) barely grew between July and November 2024. The government's official forecasting body, the Office for Budget Responsibility (OBR), predicts a GDP growth rate of 1.6% in 2029, far below the average annual growth rate of 2.8% before the 2008 financial crisis. However, the International Monetary Fund predicts that the UK's growth rates in 2025 and 2026 will be higher than those of France and Germany. Lower GDP growth will lead to slower growth in wages, incomes, and overall living standards.

Regarding the expansion of Heathrow Airport, the Chancellor stated that allowing the construction of a third runway would "create 100,000 jobs," promote investment and exports, and "unlock further growth potential." She cited a new report by Frontier Economics, which found that the project could increase the UK's potential GDP by 0.43%, or about £17 billion, by 2050. This is broadly consistent with the findings of an independent commission investigation conducted by Sir Howard Davies in 2015, which concluded that a third runway at Heathrow would support UK trade, improve productivity, and lead to a relative increase in GDP of 0.65-0.75% by 2050. However, most analysts believe that even if the planning process is expedited, the construction of a new runway could take years to begin. The government also needs to strike a balance between expanding Heathrow and meeting its climate goals. The BBC Reality Check team asked the Treasury about the source of the 100,000 jobs, and the Treasury pointed to a 2017 report by the Department for Transport, which estimated that a new runway at Heathrow could add between 57,000 and 114,000 local jobs. However, the report added that "these jobs are not new at the national level, as some jobs may be transferred from other airports or other industries."

In her speech, the Chancellor claimed that the Oxford-Cambridge growth corridor could "add up to £78 billion to the UK economy by 2035." The corridor is a revival of a previous government plan to connect Oxford and Cambridge through new transport links and allow the expansion of these two universities and research centers. To support the Chancellor's figure, the Treasury cited research by an industry group called the Oxford-Cambridge Supercluster. This research indicates that the £78 billion is a "cumulative figure" over 10 years, not growth in a single year. Analysis suggests that the project could add £25 billion in added value (GVA) to the UK economy annually by 2035. This would roughly equate to a permanent 1% increase in UK GDP by that time. UK Prime Minister Keir Starmer has stated that growth is his government's "defining mission."

Estimates of the impact of infrastructure projects on growth are inherently uncertain and highly sensitive to researchers' assumptions about what growth would have been without the project. However, most economists do believe that infrastructure projects, particularly those that allow already productive places to expand, will ultimately help the UK economy grow faster than it otherwise would. Ben Caswell, a senior economist at the National Institute of Economic and Social Research (Niesr), said: "Large infrastructure projects typically deliver growth over the long term, around 10 to 20 years. In the short term, when work starts, there may be a small demand-side boost, but not significantly enough to show up in overall GDP growth figures. However, once projects are completed, the supply capacity of the economy is permanently increased, and, all else being equal, this will lead to higher and sustained GDP growth than would otherwise be the case."

Another reform that the Chancellor believes will boost growth is allowing UK companies to use funds held in their "defined benefit pension" schemes, which provide funding for their employees' retirement. Defined benefit pension plans guarantee annual pension payments to retired workers based on their salaries during their working years. Due to rising interest rates since the pandemic, many defined benefit pension funds have moved into surplus in recent years, meaning their financial assets (investments) are greater than their financial liabilities (the amount they must pay to pensioners). The Treasury says that about 75% of plans are currently in surplus, with a total surplus of £160 billion. The Chancellor wants legislation to allow companies to use these funds for investment, while retaining safeguards to protect and guarantee workers' pension payments. Measuring the size of defined benefit plan surpluses depends on various complex assumptions about the plan and its relationship with the employer. The official pensions regulator estimates that the size was £207 billion in September 2024 under one measure, but £137 billion under another. The Treasury's estimate is roughly in between. If deployed, these funds could theoretically have a positive impact on overall business investment in the UK, which economists see as a driver of GDP growth in both the short and long term. According to official figures, total business investment was £258 billion in 2023. However, the size of any boost from this pension reform will depend on whether companies are willing to invest their surpluses, which is highly uncertain, as many companies have been seeking to transfer their defined benefit pension plans to insurance companies in recent years.