The latest GDP figures out today will give Rachel Reeves some cause for relief. The latest estimates from the ONS suggest that the economy expanded at a rate of 0.5% in the three months to February 2026. A welcome change from the doldrums that characterised 2025. But one swallow does not make a summer, and one month of strong economic expansion does not mean the UK economy is suddenly in rude health.
Of particular concern is the construction sector, which recorded a fall of 2% driven by private housebuilding, on top of the declines already recorded for December and January. These latest headline GDP figures are also in contrast to the latest forecasts from the IMF, which in light of the Iran war have downgraded UK economic growth this year by 0.5 percentage points, more than any other G7 country, to just 0.8%.
While external events like the Iran war are acting as a drag on growth across the world, the UK has been especially badly affected due to being almost uniquely exposed to an energy shock. The reason for that is not an uncontrollable external factor, but our own government’s energy policy choices over the last few decades. This has left the UK bereft of new nuclear capacity and dangerously reliant on filling the gaps in intermittent renewables with imported natural gas, despite there still being large quantities of natural gas in the North Sea and under mainland Britain. But government policy has stymied the offshore oil and gas industry and banned fracking.
However, energy is far from alone in being an area of policymaking weighing down growth. Housing and planning has been causing issues for the UK economy for even longer than energy policy has and it’s debatable which now suppresses growth more. In fact regulation policy more widely is clearly causing significant issues. Whether that’s the Employment Rights Act, combining with an ever higher minimum wage and the hike in employers’ National Insurance contributions to suckerpunch the labour market, especially for the young. Or the Building Safety Regulator and the second staircase regulation (among others) cutting away the viability of much new high rise development. Or Martyn’s Law imposing significant red tape on around 180,000 venues across the country, for little or no benefit and enormous cost.
These are just a small selection from a very long list of economically harmful regulations introduced in recent years. And that’s before you get to the impact that largely unaccountable regulators have. Whether it’s Natural England blocking development due to the presence of jumping spiders. Or the ONR effectively making the nuclear industry unviable in the UK. Or the Environment Agency requiring Hinckley Point C to install a ‘fish disco’. Numerous regulators have been pursuing policies that seem totally at odds with the growth duty most of them are meant to abide by.
While many of these policies and regulations may be popular with the public in isolation, their ultimate impact on growth clearly is not. Indeed, according to polling released in a new IEA report there is broad and deep support for more focus on growth among the general public. The public may not always understand the exact policies to get there, but they are almost unanimous that we urgently need much higher growth rates.
Alongside reversing bad regulations and ensuring that regulators act more proportionately to encourage growth, significant supply side reform is needed. For example, extending full expensing to include a wider range of investments. Currently when a firm builds a new factory, it may fully write off the cost of plant and machinery against its corporation tax bill that year. But the building itself or integral fixtures and fittings can only be written off over many years at a much less generous rate.
This creates a large disincentive to invest in new buildings in the UK. Far better to roll everything into full expensing, a change that could boost long term GDP by 2.5%.
But it’s not just about today’s industries: the opportunities in industries still approaching fruition are significant. For example, quantum computing. While it holds great risks in terms of undermining digital encryption, its potential is huge. It could solve complex optimisation problems (such as portfolio selection, logistic routes and optimal battery composition), and massively speed up medical innovation. McKinsey already estimates the global benefits could be in the trillions of dollars per year by the mid 2030s, and the organisation I work for this week published a policy note suggesting that by 2045 the cumulative benefits to the UK economy could be £1.3 trillion.
While today’s GDP estimates offer some short-term solace for the Government, the longer-term trend demonstrates that the economy is not in robust shape and needs substantial reform. We cannot afford to wait for global events to settle into a new equilibrium. We must stop looking for external solutions to the UK’s problems, and instead focus on bold changes to domestic policy that will put the economy on a much stronger footing.
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