12/07/2025 by Tony Redondo
Post-election last July, Chancellor Rachel Reeves told her Treasury team that Labour’s mission was to “deliver economic growth that is felt across the country, going further and faster than before.”
After a year in office and her 2024 budget that increased business taxes by £40bn, the Chancellor will be sweating on a miracle turnaround in the UK economy. After the tears of the previous week, this week has scarcely been better.
First, the OBR (Office for Budget Responsibility) issued its latest risk report, warning the government’s debt path is on an unsustainable footing. The UK now has the third-highest deficit and the fourth-highest debt among advanced economies. UK debt has ballooned in recent decades, up 60% relative to GDP in the past 20 years, driven by crises like the pandemic and rising healthcare costs. As a result, the cost of government borrowing has surged, and the yield on ten-year gilts is the highest since 2008 at the height of the great financial crash. Remarkably, the UK is on course to have a debt-to-GDP ratio of 270% by 2070, meaning our national debt will be 2.7 times the size of the entire economy, nearly tripling the current debt burden.
Secondly, the ONS (Office for National Statistics) reported on Friday that the economy contracted by 0.1% in May, following a 0.3% contraction in April. Another fall in June and the UK will officially be in a recession.
Just as last year, the country now nervously awaits this year’s budget in the Autumn to find out how the Chancellor aims to solve her fiscal problems. There are only three choices. Reeves must cut spending, increase borrowing, or raise taxes.
The recent rebellion in the Labour Party against the welfare reform bill suggests major spending cuts may be too politically dangerous for the Government.
The Chancellor has repeatedly reaffirmed her fiscal rules, preventing her from borrowing to finance day-to-day spending. This makes increased borrowing (unless for investment spending) unlikely.
That leaves taxes. We are now likely to see further tax rises in the Autumn Budget; the question is, which taxes? The freeze on income tax thresholds will be extended, effectively raising taxes by not aligning tax brackets with inflation. With such limited options, Reeves could be tempted to target the wealthiest individuals in the UK. The risk here is that any aggressive tax hikes could drive more wealthy individuals and their money out of the UK, shrinking the tax base in the long run. The CEBR (Centre for Economics and Business Research) estimates that if just a quarter of non-doms left the UK, the treasury could lose £4.6bn in tax revenue and over 3,000 jobs in five years. History shows that wealth taxes tested in countries like Spain and France often backfire, especially now that it’s easier than ever for the wealthy to move their money abroad.
Whatever the Chancellor decides, an increasing tax burden is highly unlikely to encourage economic growth. Reeves’ fiscal headroom is now just under £10 billion, but with a shrinking economy, this is likely to disappear well before the budget.
The political pressure on the government is also building, with junior doctors voting to strike 10 months after Keir Starmer gave them a 22% pay rise. The BMA (British Medical Association) announced this morning that 90% of junior doctors voted in favour of strike action on a turnout of 55%. Junior doctors are calling for another huge pay rise of around 29%, which would restore their pay to 2008 levels when adjusted for inflation. Health Secretary Wes Streeting handed them 5.5% this year, the highest in the public sector.
Len McCluskey, the former leader of the Unite trade union, has suggested trade unions will reconsider their support for Labour if Jeremy Corbyn launches a new political party. Last year, Mr Corbyn formed the Independent Alliance with other independent members of the Commons. According to a YouGov poll, 18% of voters would be open to voting for Mr Corbyn’s new party in the next general election.
The Unite trade union, one of Labour’s biggest financial backers, now run by Sharon Graham, has suspended Deputy PM Angela Rayner and could abandon the Labour Party, accusing the deputy PM of backing Birmingham council over the bin strikes.
Currency Exchange Rates Update
The Pound slumped to a 13-week low against the Euro, a 3-week low against the US Dollar, and a 9-week low against the Australian Dollar on Friday following the UK GDP data release.
The money markets have priced in an 89% chance that the BoE (Bank of England) will vote to reduce the Bank Rate from 4.25% to 4% at their next meeting on 7 August. A second-interest rate cut is priced in by traders before the end of the year, with the market expecting a third cut no later than June 2026.
https://bmmagazine.co.uk/in-business/reeves-economic-plans-threatened-trump-tariffs
This week, the key economic data releases include:
Monday China Trade Balance
Tuesday China GDP & Industrial Production
USA CPI Inflation
Canada CPI Inflation
Wednesday UK CPI Inflation
USA PPI Inflation
Thursday UK Employment and Wages
EU CPI Inflation
Germany CPI Inflation
Friday USA Consumer Sentiment
What’s in the news?
UK
A recent parliamentary report revealed that the cost of economic crime in the UK exceeds £290bn annually, representing 17.5% of GDP, equivalent to the combined health and education budgets. The report highlights that HMRC has not imposed fines on any offshore tax evaders in the past five years, and over 170 properties valued at £2.5bn have been acquired through suspicious means with a quarter of Serious Fraud Office cases involving companies from the UK’s Overseas Territories. The report suggests that addressing tax evasion and promoting asset recovery could be effective solutions, but progress remains slow, particularly as five overseas territories failed to meet a deadline for establishing company ownership registers, potentially leading to a constitutional conflict with the UK.
The Halifax reported that in June, UK house prices were stagnant. The data underlines the subdued state of Britain’s housing market following the increase in property taxes in April.
Good news
Professional services firm Deloitte says the UK has risen the ranks to become the joint top location for investment among Chief Financial Officers around the world. Deloitte analysts asked senior personnel at FTSE 100 and FTSE 250 companies, plus UK private companies and subsidiaries listed overseas, with the overall value of firms taking part in the survey totalling £386bn. The UK was also viewed as an attractive destination by business leaders, placing it joint top alongside India. Richard Houston, chief executive of Deloitte UK, said, “This renewed confidence, coupled with a rise in risk appetite, is welcome and underscores the considerable investment potential the UK offers.”
Not so good news
A new report published by leading small business insurance provider, Simply Business, reveals the lasting effects of rising prices and fluctuating consumer demand on this essential sector, with small businesses blaming the Chancellor as almost one million fear closure after a year of soaring costs.
The UK’s 5.5 million small businesses, accounting for 60% of all private sector employment and providing £2.8 trillion in turnover each year, SMEs are vital to the UKs economic success, yet 18% fear they could be forced to close permanently if conditions don’t improve and 25% say they will need to use their savings to prop up their business amid mounting financial pressure. In 2023, just over a quarter of SME’s thought the economy would worsen over the course of the year. This has now increased to 50%.
Business advisory firm BDO reported that employment in the UK has stagnated at a 13-year low. Business confidence continues to remain underwhelming. BDO’s Business Trends report predicts optimism will stay well below long-term averages through the second half of the year.
The UK hospitality sector has lost 69,000 jobs since the Chancellor increased national insurance contributions, marking the steepest peacetime job losses outside the pandemic. UKHospitality chief executive Kate Nicholls said, “Unless there is a change of tack by the Government, we are looking at 150,000 to 200,000 fewer workers in hospitality.”
USA
President Trump announced 25% tariffs on imports from Japan, South Korea, Malaysia, Kazakhstan, South Africa, Laos and Myanmar starting on the 1st of August with the 25% tariffs separate from additional sector-specific duties on key product categories and 35% tariffs on Canada, also staring on 1 August and warned of higher levies if Ottawa retaliates. Trump cited fentanyl as a reason for the tariffs on Canada.
Trump then announced a 20% tariff on Philippine goods (up from 17%), a 30% rate on Sri Lanka (down from 44%), Libya, Algeria, and Iraq (down from 39%), and a 25% rate on Brunei and Moldova.
Trump also announced a 50% tariff rate on copper imports but sounded more positive about the EU, saying he is “probably two days off from sending an EU letter.”
Trump also threatened an extra 10% tariff on countries that align with ‘Anti-American’ BRICS (Brazil, Russia, India, China and South Africa) policies.
A survey from the New York Fed showed US consumers are feeling better about their finances and expect inflation to hold steady, while confidence in household finances continued to grow.
According to data presented by Stocklytics.com, the combined value of the Wall Street banking and investment giants is now worth a staggering $59.7 trillion, more than the combined GDP of the United States, China, and Germany. The second-ranked China had nearly six times smaller value of listed companies, at around $10 trillion. Far below, Euronext, Japan, Hong Kong, and India followed with $6.99 trillion, $6.92 trillion, $6.36 trillion, and $5.22 trillion, respectively. The total market value of all companies trading on the London Stock Exchange (LSE) is $3.42 trillion.
North Carolina, for the third time in the last four years, is America’s Top State for Business in 2025. Massachusetts is 2025′s Most Improved State. Alaska finishes last.
The EU
EU Commission President Ursula von der Leyen survived a vote of no confidence last week. The motion contained various allegations against von der Leyen, including text messaging privately with the chief executive of vaccine maker Pfizer during the COVID-19 pandemic, misuse of EU funds and interference in elections in Germany and Romania. The motion was defeated in a 360-175 vote against it, with 18 lawmakers choosing to abstain during a plenary session at the European Parliament in Strasbourg, France.
Wealthy individuals in Europe are increasingly facing “exit taxes” as countries like Germany, Norway, and Belgium implement stricter measures to prevent high-net-worth residents from emigrating. These taxes impose a one-off charge on the value of assets when leaving, aimed at curbing the trend of affluent citizens relocating to low-tax nations such as Switzerland and the UAE.
Trade tensions between China and the European Union have long been simmering but now appear to be heating up with little expectation for the relationship to improve. Marc Julienne, director of the Centre of Asian Studies at the French Institute of International Relations, said, “What was once a domain of great opportunity and enthusiasm for the bilateral relationship has now become more about risks than opportunities.”
Others
OPEC+, an eight-nation subset of the 12-member OPEC oil-producing alliance, agreed to lift production by a larger-than-expected 548,000 barrels per day in August. Oil prices have been volatile of late, with the conflict between Iran and Israel.
The RBA (Reserve Bank of Australia) surprised the markets by not cutting interest rates last week, as had been widely expected, opting to leave the cash rate at 3.85% amid falling inflation, sluggish economic growth, lower living standards and low productivity. Whilst the domestic economy warranted a cut, the RBA has an eye on the bigger global picture and foresees difficult times ahead as the US tariffs bite.
The RBNZ (Reserve Bank of New Zealand) also opted to pause last week but offered clues suggesting a rate cut might not be far off.
Stranger than fiction
The global population increased by around 760 million during the last decade, yet the number of people without access to electricity has decreased by 292 million. This means that 92% of humanity now has access to electricity, up from 87% in 2010.
A new report shows that since 1990, EU air pollution has plummeted with the EU-27 slashing sulphur dioxide by 95%, nitrogen oxides by 66%, ammonia by 36%, and fine-particle pollution by 41%, overshooting all targets agreed in 2016, and already 16% ahead on the tougher 2030 SO₂ target.
Quote
Margaret Thatcher, “The problem with socialism is that you eventually run out of other people’s money.”
