Recent assessments indicate that the UK government is set to miss its target of achieving the highest economic growth rate in the G7, despite Labour’s leader Rachel Reeves announcing a £100 billion investment initiative during her inaugural budget.

The Office for Budget Responsibility (OBR) projects per capita growth in gross domestic product (GDP) to be 1.1% by 2029, which would place the UK in a joint second position within the G7. Throughout the duration of the current parliament, the average annual per capita GDP growth is expected to be around 1%, ranking the UK joint third among leading economies.

Labour has committed, as part of its election manifesto, to achieving “the highest growth rate in the G7 over consecutive years by the end of the parliamentary term.”

An analysis utilizing the latest International Monetary Fund (IMF) data for global per capita GDP growth, combined with the OBR’s budget forecast revealed on Wednesday, shows that the UK would secure a joint second position in 2029. During this parliamentary term, the UK’s annual per capita GDP growth will rank joint third, in a tie with France. Notably, UK growth is not expected to lead the G7 in any consecutive years until 2029.

The United States is projected to achieve the highest growth in the G7, with an expected per capita GDP growth of 1.7% by 2029, alongside an average annual growth rate of 1.8% over the next five years.

Japan is also anticipated to rank joint second, with a per capita GDP growth rate of 1.1% in 2029, alongside an average annual growth rate of 1.2%. Canada is expected to experience the lowest growth both in 2029 and throughout the next five years, closely followed by Germany.

The analysis suggests that the Chancellor’s strategy to boost public investment by £100 billion over the next five years, funded through borrowing, may take decades to yield significant benefits for the economy. The OBR previously noted that it could take as long as 50 years for government investments to substantially enhance growth, although they may ultimately pay off through increased tax revenues and GDP growth.

On Wednesday, the Chancellor remarked that the spending watchdog assessed the potential impact of these investments could result in a GDP increase of up to 1.4%, stating, “This budget will permanently increase the supply capacity of the economy … boosting long-term growth.” However, the benefits to GDP may not peak until the 2070s.

According to the OBR, compared to previous forecasts in March, Reeves’s proposals are expected to increase government borrowing by an average of £28 billion each year from 2024-25 to 2028-29.

This increase in borrowing, noted by the OBR as one of the largest surges outside of a crisis since March 1992’s pre-election budget, is likely to significantly raise the government’s annual debt interest costs. The OBR estimates that debt interest payments will exceed £100 billion every year until 2029-30, reaching a peak of £122.2 billion.

Headroom against the new fiscal rules is considered limited. For the binding rule that mandates financing everyday expenditures with tax revenues, the margin stands at £9.9 billion, while the margin for reducing public sector net financial liabilities (PSNFL) as a proportion of GDP is forecasted at £15.7 billion. The OBR also forecasts that debt excluding the Bank of England will increase as a share of GDP annually over the forecast period.

Richard Hughes, chair of the OBR, mentioned a potential “loophole” that could allow governments to use PSNFL as a debt measurement by directing new public investments through financial vehicles. This would increase the government’s assets, potentially offsetting its liabilities.

By 2029-30, real government spending on day-to-day operations is projected to increase by £49 billion, with a large portion allocated to the National Health Service and education. Together with increased capital budgets, the Chancellor announced a total of £70 billion in additional government spending at the budget announcement.

These spending increases were backed by £41.5 billion in tax raises, characterized as “the biggest package … on record,” according to the Resolution Foundation think tank.

In addition to other measures, the Chancellor increased employers’ national insurance contributions by 1.2 percentage points and adjusted the main rates of capital gains tax and tobacco duties. Consequently, the overall tax burden is projected to peak at 38.3%, the highest level recorded.

Despite these considerable tax hikes, unprotected government sectors, including local councils and the justice system, are still facing significant cuts. These sectors experienced the most severe reductions during the austerity measures following the 2008 financial crisis.

Current inflation forecasts suggest that rates will exceed the Bank of England’s target of 2% on an average annual basis through 2029, compelling the central bank to adopt a more cautious stance regarding interest rate reductions from the current 5% level.

The spending watchdog indicated, “The Bank of England would be expected to act to bring inflation back to target over the medium term,” adding that the chancellor’s policies could, at their peak, contribute an additional 0.5 percentage points to consumer prices index inflation by stimulating demand in the short term.