What is going on in the British economy?
Plus: jobs, inflation, and just stopping oil
In today’s newsletter:
Can we just stop oil?
New jobs and inflation data
The 2026 Hayek Memorial Lecture
What is going on in the British economy? You might be forgiven for wondering, if you had just looked at the economic statistics released at the end of this week.
On the one hand, we got the worst unemployment figures for some years. Overall unemployment is at a five-year high and youth unemployment rose to 14% (on top of an inactivity rate that is now nearly 30%). This seems to suggest an economy that is slowing significantly. And that, of course, is what last week’s overall economic growth figures told us too.
On the other, the public finance figures for January were notably better than expected - a £30bn surplus compared to last year’s £15bn - and there was good news on retail sales too, with a jump of 1.8% in January alone.
How are these apparently contradictory signals to be reconciled? Well, there is only one British economy, so a reconciliation must be possible. One must therefore go back to the root causes to explain the figures.
For the jobs market, it’s easy. Employers have already been hit by one round of jobs taxes, the increase in national insurance. The minimum wage continues to tick upwards faster than wage or productivity growth. And the prospect of the Employment Rights Act, now passed by Parliament and coming into force soon, has depressed confidence still further. It’s hardly surprising that some businesses, especially in the hard pressed hospitality sector, are giving up, and that others are simply not taking on new staff. Here, the cause and effect is clear.
On the other data, the causes are harder to assess. It’s certainly possible that, having emerged from the bleak end to 2025, there has been a little bounce back as - for better or worse - the November budget and the contents of the Employment Rights Act are at least now known. But it seems unlikely this represents a resumption of sustained growth - it’s more a release of some spending that was held back.
As for the public finances, the ONS themselves caveat the latest figures by pointing out that some tax due at the end of January is not actually received till February, and therefore that one should look at the two months together. So we must to some extent reserve judgement. Moreover, we can see that £7bn of the increased tax take comes from a jump in capital gains tax receipts, which in this case relates to sales of assets before April 2025. Here, the only plausible explanation is that people were selling more assets than expected, either because they were leaving the country, or because they feared increases in capital gains tax rates, or both. What we can confidently say is that this positive public finances picture has nothing to do with the current performance of the economy.
So in fact the picture can be reconciled. The statistics all reveal, entirely consistently, an economy that has been slowing for at least the last year, and one in which economic actors consistently expect government policy to get worse not better and tailor their own behaviour accordingly. Until that changes, we can’t expect growth and incomes to start improving on anything like a sustainable basis.
Lord Frost
Director General
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IEA Podcast: Director of Communications Callum Price is joined by Director General David Frost and Editorial Director Kristian Niemietz to discuss the Reform UK’s economic plan, job losses, government surpluses, and dodgy data - IEA YouTube
Can we Just Stop Oil?
A new IEA Discussion Paper by Kathryn Porter
No credible forecast shows UK oil and gas demand falling to zero by 2050, even under net zero scenarios – oil and gas are essential ingredients in plastics, fertilisers, medicines and modern technology
The 78% headline tax rate is forcing a decline in North Sea production and driving investment overseas, with the workforce forecast to halve to as low as 57,000 by the early 2030s – losing up to 1,000 jobs a month
Replacing domestic production with imports increases overall emissions by around 50% and risks gas shortages on cold winter days as early as 2026/27
Shutting North Sea ‘will drive up carbon emissions’, The Telegraph
Government ‘should end mad ban on North Sea oil’ as study eviscerates Net Zero plan, Daily Express
Government’s Ban on North Sea Oil Drives Up Carbon Emissions, GuidoFawkes
Lord Frost takes brutal swipe at Government’s ‘Net Zero madness’, GB News
News and Views
Tinkering with regulated prices won’t solve the cost of living crisis
The renewed decline in inflation in January, from 3.4% to 3.0%, is welcome but this rate is still a full percentage point higher than the official target of 2.0%. That target has not been met since June 2024, which happened to be the last month under the previous government.
Why men are finding themselves out of work and on the scrapheap, Editorial and Research Fellow Len Shackleton quoted on the latest jobs data in The Telegraph
Referencing the grim package of economic data published on Tuesday, Professor Len Shackleton, at the Institute of Economic Affairs, said: “Apart from the human consequences of the labour market trends, they have strongly negative fiscal effects as tax take falls and benefit payments rise.
“They also expose the fallaciousness of government claims about promoting growth. We need a major reset of labour market policy, but there is currently little prospect of this.”
Read Len’s full take:
“Vapers going back to smoking is by far the most likely consequence of the vaping ban”, Head of Lifestyle Economics Chris Snowdon on the vape ban in The Critic
You cannot regulate your way to stronger employment, Lord Frost quoted in the Daily Mail
Lord Frost, the former chief Brexit negotiator who is now director general of the Institute of Economic Affairs, said the surge in unemployment was ‘the predictable result of a government that seems determined to make it more expensive and more risky to create jobs’. He said: ‘Higher business taxes and the Employment Rights Act send a clear signal to employers to think twice before hiring. You cannot regulate your way to stronger employment.’
The student loan scam, Peter Ainsworth talks about how to fix university fees, IEA YouTube
“Increasing growth from 1% to just 2% would give you half of that £30bn in tax receipts”, Lord Frost on the importance of growth to funding our defence in The Telegraph
How long can ministers claim they’re headed in the right direction? Callum Price on what the jobs data says about the Government’s growth mission, CityAM
The countries cracking down on vaping with fines, jail time and even caning, Chris Snowdon and the Nanny State Index referenced in The Telegraph
Christopher Snowdon, head of lifestyle economics at the Institute of Economic Affairs and editor of the Nanny State Index, which ranks countries by how much they interfere with people’s lifestyle choices, said: “The World Health Organisation’s campaign against vaping has been influential, especially in low- and middle-income countries. “Bans on vaping and e-cigarette flavours, as well as e-cigarette taxes, have been steadily growing for years and it is important for travellers to be aware of what the rules are.”
‘There’s never a good time to scrap BBC TV licence fee - so do it now’, Chris Snowdon quoted in The Daily Express
Chris Snowdon at The Institute for Economic Affairs agrees saying subscription to the BBC instead of a licence fee would not mean quality would suffer. He said: “There is no reason to assume that the BBC will have to ‘dumb down’. There is plenty of serious, highbrow programming on commercial and/or subscription channels such as Channel 4, ITV, Sky Arts, Netflix and Amazon. Why? Because lots of people want it – and if they want it, they will pay for it.”
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