Director Weekly  An unexpected fall in GDP reinforces warnings about the risks facing the UK economy

Alarm bells will have been ringing in the Treasury with Friday’s data showing that the economy unexpectedly shrank 0.1% in May. The data seems to be affected by business activity shifting around government policy, including US tariffs, so it is difficult to read the underlying trends. Yet it is a reminder that growth remains tepid – and beset by risk.

The sheer extent of those risks was set out plainly earlier in the week, in a series of reports from the Office for Budget Responsibility (OBR). They do not paint a pretty picture – and the OBR’s chair, Richard Hughes, was blunt.

“The UK public finances are in an unsustainable position in the long run,” warned Hughes. “The UK cannot afford the array of promises that it has made to the public.”

The reports highlight both highly proximate risks and longer-term concerns. The former include a potential slowdown this year: even a very small downgrade in the OBR’s growth forecasts ahead of the autumn Budget would take £10 billion out of the accounts. Then there’s the volatility of government borrowing costs – and the vexed question of welfare spending.

Welfare is a long-term challenge but has become an immediate problem thanks to the U-turns (including on winter fuel payments) that have left a £5 billion hole in the public finances. The big political question this summer is: how will the Chancellor fill that hole?

Her options have been somewhat constrained by the Spending Review; there is no prospect of revisiting departmental settlements. But that only accounts for about half of public spending. The other half includes social security – and here, surely, is where the Chancellor should focus.

As the OBR points out, current trends are unsustainable – not only on welfare but on pension spending, which is set to rise from 5% of GDP to 7.7% by the 2070s. Yes, that reflects the UK’s ageing population, but it’s also a result of policy choices. The triple lock has cost three times more than predicted thanks to recent inflation shocks; it will cost £15 billion a year more in 2029 than simply increasing pensions in line with earnings.

Better targeting of public spending on those who need it most will be essential. That entails difficult policy decisions – and the politics will clearly be tricky, too.

But there is surely no alternative to reining in unsustainable spending. The government continues to rule out raising VAT, individual National Insurance contributions, or income tax (though it may extend the current threshold freeze). The OBR also (belatedly) highlights the growing risk of high-worth individuals leaving the UK, making a wealth tax highly risky – and another raid on business could kill growth completely.

So as the summer recess approaches, it would be helpful for the government to reassure employers about its intentions for this autumn’s Budget.

Tough policy choices lie ahead – but it’s important that speculation about tax is not allowed to erode business confidence yet further.