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Rachel Reeves has been warned that expected tax rises in October’s Budget could damage growth, after surprise new figures showed the economy flatlining.
Economists said there could be further misery ahead as a result of the chancellor’s decisions and higher energy bills this winter.
In May, the chief economist at the Office for National Statistics (ONS) described the economy as “going gangbusters”.
But the latest figures unexpectedly showed growth has stalled for the second month in a row. The ONS gross domestic product (GDP) recorded no growth in July.
In response, the chancellor said: “I am under no illusion about the scale of the challenge we face and I will be honest with the British people that change will not happen overnight” as she hit out at “14 years of stagnation” under the Conservatives.
She also defended her government’s difficult decisions, including axing the winter fuel payments for almost 10 million pensioners, suggesting the latest figures highlighted why they were necessary.
She said: “These weren’t decisions that I wanted to make. They weren’t decisions that I expected to make, but in the circumstances that we faced, it was absolutely right to make sure that our public finances were on a firmer footing.
“Because only through doing that do we have the chance to bring stability back to our economy and start to grow the economy.”
Over the summer Ms Reeves warned taxes would have to rise in the Budget to plug a £22bn hole in the public finances left by the Conservatives.
The chancellor refused to rule out hiking capital gains tax and inheritance tax and pursuing pension reform to fill the gap.
Setting the scene for a difficult financial statement, she said: “I think that we will have to increase taxes in the budget.”
Households will also face higher energy bills this winter after the regulator raised the price cap by 10 per cent.
Suren Thiru, economics director for the Institute of Chartered Accountants in England and Wales, warned that growth could slow further in the coming months with “higher energy bills and expected tax rises likely to trigger renewed restraint in spending and investment”.
Top economists also warned that further spending cuts could add to the troubles facing the UK economy. Max Mosley, senior economist at the National Institute of Economic and Social Research (NIESR), told The Independent the flatlining GDP growth was due to “years of underinvestment and weak productivity growth”.
He added: “It will take bold and substantial investment today to avoid more disappointing GDP numbers in the future.
“Today’s flatlining GDP numbers are disappointing, but we should be careful not to overreact to volatile, monthly measures of economic performance.”
And Simon Pittaway, senior economist at the Resolution Foundation, said: “After a strong start to the year, growth came to a halt in June and July, driven by falls in production and construction. Only Britain’s relatively resilient services sector prevented the economy from contracting at the start of the summer.
“Of greater concern is the fact that what growth there has been this year has been ‘unproductive’ – driven by rising hours, not rising output per hour. Productivity fell by 0.5 percentage points in the three months to July. Turning this around is the biggest economic challenge Britain faces.”
ONS director of economic statistics Liz McKeown said: “The economy recorded no growth for the second month running, though longer-term strength in the services sector meant there was growth over the last three months as a whole.
“July’s monthly services growth was led by computer programmers and health, which recovered from strike action in June. These gains were partially offset by falls for advertising companies, architects and engineers.
“Manufacturing fell, overall, with a particularly poor month for car and machinery firms, while construction also declined.”
The economy grew 0.6% between April and June, suggesting it had turned a corner after it fell into a technical recession, defined as two consecutive quarters of negative growth.
