14th September 2026
The Government's latest attempt to get Britain's economy moving faces a difficult test. The Prime Minister is bringing together business leaders through the Growth Panel to discuss how investment, productivity and economic growth can be increased.
The ambition is straightforward enough. Britain needs faster economic growth if it is to raise living standards, generate more tax revenue and make the country's growing public debt easier to manage.
But the timing could hardly be more awkward.
Oil prices have been rising sharply as the conflict in the Middle East disrupts energy supplies and shipping. At the same time, government bond yields have been moving higher, increasing the cost of borrowing. Markets are also becoming more concerned that the Bank of England may have to raise interest rates again if the energy shock feeds through into inflation.
This creates a fundamental problem for the Government.
How do you encourage investment and growth when the cost of money is going up?
Britain needs investment
There is little doubt that Britain needs more investment.
Infrastructure has suffered from years of delays, while businesses complain about planning restrictions, skills shortages, high energy costs and uncertainty over government policy.
Investment in housing, transport, energy, digital infrastructure and new industries could increase productivity and create better-paid jobs. The Government is also looking towards artificial intelligence and other technologies to improve productivity.
That is the attractive side of the growth argument.
If Britain can produce more with the same workforce, the economy can expand without simply relying on higher government spending or an ever-growing population.
But investment requires capital.
And capital is becoming more expensive.
The bond market problem
Government borrowing costs are particularly important because Britain already carries a very large national debt.
When investors sell government bonds, their prices fall and yields rise. Higher gilt yields then increase the cost of issuing new government debt and eventually refinancing existing borrowing.
That can restrict the Government's room for manoeuvre.
There is a further complication. Businesses also face higher borrowing costs when interest rates and bond yields rise. A company considering a new factory, warehouse, data centre or other major project may be less enthusiastic if financing the project suddenly costs considerably more.
The Government can encourage investment, but it cannot simply command investors to borrow money.
Then comes oil
The latest oil-price increases could make the problem still harder.
Oil affects almost every part of the economy. Petrol and diesel become more expensive. Transport costs rise. Manufacturing becomes more expensive and fertiliser prices can increase, eventually feeding into food prices.
If the oil shock proves temporary, the Bank of England may be able to look through it.
But if oil remains above $100 a barrel for months, the consequences could become much more serious.
Businesses may pass higher costs on to customers. Workers may demand higher wages to compensate for rising living costs. Inflation could then become more persistent.
That is when interest rates become a problem for the Government's growth strategy.
The Bank faces an awkward choice
The Bank of England cannot produce more oil or reopen disrupted shipping routes.
It can, however, raise interest rates to prevent a temporary inflation shock becoming embedded in the economy.
That could mean the Bank holding rates higher for longer, or even reversing some of the reductions that had been expected.
Markets are already considering the possibility of several quarter-point increases over the coming year if inflationary pressures persist.
For households with mortgages and businesses dependent on borrowing, that would be unwelcome news.
It would also make government borrowing more expensive.
Can growth solve the problem?
This is the crucial question facing the Growth Panel.
In theory, faster growth makes Britain's debt burden easier to manage. A larger economy generates more tax revenue and makes existing debt smaller relative to national income.
But growth cannot be produced simply by announcing a growth strategy.
Britain needs faster planning decisions, better infrastructure, more skilled workers, reliable and affordable energy and an environment in which businesses are confident enough to invest.
And it needs them at a time when the international economic environment is becoming more difficult.
There is therefore a certain irony in today's Growth Panel.
The Government is trying to encourage businesses to invest more just as oil prices are pushing costs higher, bond investors are demanding greater returns and financial markets are contemplating higher interest rates.
The answer may ultimately be that Britain can grow its way out of some of its problems.
But it will not be easy.
The country needs investment to raise productivity, productivity to raise growth, and growth to improve the public finances.
What it does not need is another inflation shock that forces interest rates higher just as that process is getting started.
The coming months could therefore provide a crucial test of whether Britain's growth strategy can survive an increasingly hostile financial environment.