From tariffs to talent gaps: Vicky Pryce unpacks the UK’s road to inclusive growth

Jun 22, 2025

(Image: Vicky Pryce, Chief Economic Adviser)

Vicky Pryce, Chief Economic Adviser at the Centre for Economics and Business Research, and she rejoined us on The Purse Podcast to discuss the latest economic trends and challenges facing the UK.

She shares her insights on mixed signals in the UK economy, inflation, interest rates, and the economic repercussions of government budget decisions. The conversation also covers the UK's investments in R&D and AI training, the politics of immigration, tax and trade, and the impact of geopolitics on long-term resilience. Finally, we look into the biggest risks and opportunities shaping the UK's economic future:

1. Economic Outlook: Q1 Growth vs April Contraction

The UK economy grew by 0.7% in Q1, showing resilience early in the year.
However, April saw a 0.3% contraction—the sharpest monthly decline since October 2023—driven by a slowdown in services, manufacturing, and exports, particularly impacted by U.S. tariffs.

Vicky explained that the Q1 boost was artificially inflated as firms “were trying to produce and then export…before the tariffs hit,” and she described the April dip as “entirely predictable.”

2. Inflation, Interest Rates & Labour Market

Inflation remains at around 3.4%. The Bank of England expects inflation to be at 2-2.5% within the next year or year and a half.
However geopolitical uncertainty may impact inflation eg rise in oil prices.
The April inflation uptick was driven by seasonal and regulatory increases, notably in water bills, mobile-phone charges, vehicle tax, stamps, and other fees.
Wages are increasing faster than inflation, and the household savings ratio is high (around 10–12%), providing a financial buffer.
The Bank of England has cut rates to 4.25%, with markets anticipating two further cuts in 2025.
Meanwhile, unemployment has risen, and payroll numbers are falling, reflecting emerging labour market pressures.
Vicky specifically flagged that employers are reacting to the national insurance contributions increase (introduced in April), by delaying hiring, cutting payroll numbers, or limiting wage growth.
Tariffs may slow down the economy and therefore dampen inflation.

She noted that while some inflation pressure may ease due to weaker demand, a deteriorating labour market could constrain household spending and overall growth.

3. Tax Reform & Wealth Flight

The abolition of non-dom status led to the departure of over 10,000 millionaires in 2024.
Ten years ago, non-doms were contributing approximately £6-£7 billion in non doms to the Exchequer on an annual basis.
Vicky cited a CBI analysis warning that if more than 38% of non-doms leave, the UK could end up losing more in investment than it gains in tax revenue.
She emphasised that taxing wealth without a coordinated and strategic investment policy risks undermining the UK’s global competitiveness and ability to attract capital and talent.

4. Spending Review & Fiscal Strategy

Rachel Reeves’ Spending Review protects NHS funding and commits to raising defence spending to between 2.5% and 3% of GDP by 2027, primarily through long-term capital projects.
Other departments, including the Foreign Office and DEFRA, are expected to face real-terms cuts, prompting concern over a return to “austerity by stealth.”
Vicky confirmed that the Labour government plans to spend £70 billion more per year than was forecast under the March 2024 Conservative budget—“if it all happens, and it could be more.”
This will be funded by £40 billion in additional taxes each year and £30 billion in borrowing.
She warned that debt servicing costs now exceed £100 billion annually, driven by high interest rates and bond yields, still elevated since the Truss budget.
To justify higher borrowing, the government has revised fiscal rules to recognise the long-term value of infrastructure, using net present value to offset debt-to-GDP ratios.
Vicky noted that further tax rises may come in the Autumn, such as freezing income tax thresholds, a tactic used by the previous government to quietly raise more revenue.
Her bottom line: growth must follow investment, or market confidence, and cheaper borrowing, could falter.

She stressed the need to reform fiscal rules so they properly account for the long-term value of infrastructure and innovation, investments currently treated as short-term costs under existing accounting rules.

5. R&D, AI Training & Innovation

The UK has pledged £86 billion for R&D across life sciences, AI, and clean energy, including new funding for AI training and apprenticeships.
Vicky emphasised that this investment must also reach women-led ventures, SMEs, and regional players, not just large incumbents.
She also stressed that building AI capacity isn’t just about technical expertise. It requires developing a broader human workforce to “work around AI”—supporting its deployment and integration across sectors. This includes a wide range of skills and collaborative efforts between industry and education.
She warned against the UK’s pattern of launching ambitious strategies but falling short on execution. Without real follow-through; especially in training, re-skilling, and building practical bridges between education and employment, public investment risks failing to deliver meaningful returns for the economy or the workforce.

6. Immigration, Skills & Workforce Strategy

Vicky emphasised that the UK’s ambitious economic agenda, particularly in green tech, AI, and infrastructure, is being undermined by serious labour shortages:

“We just don’t have the people to do all the things we want to do.”

She noted the urgency of addressing workforce gaps and outlined several solutions:

Flexible work models for all including older workers, referencing Japan as an example of extending working lives and increasing participation.
Better re-skilling and upskilling, so domestic workers can move into high-demand sectors like clean energy, advanced manufacturing, and digital tech.
Targeted immigration to fill critical gaps, warning that tighter rules, such as higher sponsorship fees, may restrict access to needed talent.

She also stressed the need for stronger alignment between education, training, and industrial policy, to ensure innovation isn’t held back by workforce constraints.

Vicky also argued that HR must play a more strategic role, identifying skills gaps, enabling cross-sector mobility, and investing in workforce planning to ensure the UK can deliver on its industrial ambitions.

7. Trade, Energy Security & Geopolitics

Vicky discussed the economic impact of recent U.S. tariffs on UK exports, including those affecting aluminium and flagged the uncertainty that a second Trump presidency would bring to trade policy.
She underscored the importance of maintaining access to EU services markets, especially for the UK’s financial and innovation sectors.
On energy, she explained that public support for nuclear and renewables increases when framed around national and economic security, not just climate targets. This framing has grown in significance since the war in Ukraine.
She cautioned that rising geopolitical instability, from trade wars to energy shocks, could damage UK investment confidence and long-term economic planning.

8. Risks & Opportunities

Biggest risk:

“Confidence: both business and consumer confidence. If we combine lacklustre growth with restrictive interest rates, we risk entering a long period of stagnation.”

Biggest opportunity:

“The UK’s creativity, its ability to attract people, and its world-leading R&D base. If we re-establish strength with Europe and make smarter use of our talent, there’s huge potential.

Listen to the full interview with Vicky Pryce on The Purse Podcast

We’d love to hear from you. Get in touch with Jana via the The Purse website or tweet @jointhepurse and janicka. We do no provide investment advice. Please do your own research or speak to a financial adviser.

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