After expanding by 0.7% in the first quarter of the year, output struggled at the start of the second quarter, shrinking by 0.3% in April. The damp performance is likely to continue, with economists expecting a 0.1% decline over the second quarter. The dashboard is flashing warning signs. The economic data for the start of the year was flattered by people bringing forward house purchases to beat the stamp duty holiday deadline as well as businesses racing to get orders out of the door to beat possible US tariffs. Now that those temporary factors have faded away, we can better gauge the state of the economy. It makes for unpleasant reading. A hobbled economy We are still being hobbled by low growth and high taxes, and the two are reinforcing each other. In a more detailed breakdown, the ONS revealed that the services sector shrank by 0.4%. Although economists were expecting consumer spending to hold up, businesses are gripped by a crisis of confidence, with higher national insurance contributions forcing them to put up prices. This led to a drop in sales. At the same time, the legal sector also came crashing down to earth following a drop in house purchases. Consumers have less space than usual to absorb price rises, with utility bills on the up and general inflation proving persistent. Taxes are already at a generational high, and they could go higher if the economy disappoints. The Chancellor Rachel Reeves's headroom against her fiscal rule is tight, with debt interest payments on the country's debt eating into her room for manoeuvre. A Reeves or a Trump problem? The chancellor today pointed to factors outside of her control, hinting towards President Trump's tariff policy. Most of Britain's problems are domestic ones - high government borrowing costs, rising cost of living pressures and higher taxation, but geopolitical forces have also conspired against us. The production sector, which captures manufacturing, fell by 0.6%. This was driven by a 9.5% drop in the manufacturing of cars, with industry groups warning of a slump in export orders after Trump's imposition of industry-wide tariffs at the end of March. British officials are hopeful that the US will start lifting car tariffs this week after a deal was struck back in May, but it still hangs in the balance. Even then, a new quota limits the scope for companies to grow in the US market. That's bad news for the likes of JLR, the maker of Jaguars and Land Rovers. All this matters for a chancellor with a historically small fiscal headroom. Even small changes in the growth outlook could derail her plans, forcing further tax rises to pay for her spending plans. She is betting big on investment in infrastructure- trains, nuclear power, social housing - but it could take many years for that to pay dividends, if it pays dividends at all. In the meantime, the debt continues to grow as she borrows to fund those projects, putting further pressure on her budget to cover the interest payments alone. It's a painful feedback loop for the economy.

Darren Jones compared the real spending review, delivered by Rachel Reeves on Wednesday, and the Sky News AI (artificial intelligence) projection last week. Sky News took the Treasury's spring statement, past spending reviews, the 'main estimates' from the Treasury website, and the Institute for Fiscal Studies' projections, and put them into ChatGPT, asking it to calculate the winners and losers in the spending review. Politics Hub: Tap here for live updates This was done 10 days ahead of the review - before several departments had agreed their budgets with the Treasury - on the basis of projections based on those public documents. It also comes amid a big debate kicked off by Sky News about the level of error of AI. The Sky News-AI projection correctly put defence and health as the biggest winners, the Foreign Office as the biggest loser, and identified many departments would lose out in real terms overall. It suggested the education budget would be smaller than it turned out, but correctly highlighted the challenges for departments like the Home Office and environment. Watch what happened with Sky's AI-generated spending review Reviewing the exercise, the author of the real spending review told Sky News that this pioneering use of AI was "pretty, pretty good". He added: "I could be out of a job next time in 2027, which to be honest, it's not a bad idea given the process I've just had to go through." The Treasury made a number of accounting changes to so-called "mega projects" which AI could not have anticipated, and changed some of the numbers. Asked to give it a score, Mr Jones replied: "I'm going to give it 70%." The spending review includes AI as a tool to save money in various government processes. Asked if 70% accuracy is good enough for government, he replied: "Well we're not using your AI. We've got our own AI, which is called HMT GPT, and it helps us pull together all the information across government to be able to make better, evidence-informed decisions."

There were billions for social housing, nuclear power stations, rail lines and research and development to power the economy. There was money for schools, the police, the NHS, and defence spending, as the chancellor sketched out her roadmap for Britain for years to come, with an acknowledgement that the government - and particularly this chancellor - had endured a difficult first year. "We are renewing Britain. But I know that too many people in too many parts of our country are yet to feel it…the purpose of this spending review is to change that," she said. Politics Hub: Tap here for the latest news There was £113bn of borrowing to fund capital investment and an extra £190bn over the course of the parliament for public services, fuelled by those contentious tax rises in the budget last autumn. This was a Labour chancellor turning her back on austerity. "In place of decline, I choose investment. In place of retreat, I choose national renewal," she said. The chancellor deserves credit for the capital investment, which she hopes will unlock jobs and power economic growth. But when something sounds too good to be true, it normally is. For me, former shadow chancellor John McDonnell hit the nail on the head on Wednesday night as he remarked rather wryly to me that "the greater the applause on the day, the greater the disappointment by the weekend". Could tax hikes be needed? Because, in talking up the prospect of national renewal, the chancellor glossed over what the "hard choices" mean for all of us. There are questions now swirling about where the cuts might fall in day-to-day budgets for those departments which are unprotected, with local government, the Home Office, the Foreign Office, and the Department for Environment all facing real-terms cuts. My colleague Ed Conway, analysing the government figures, found cuts in the schools budget for the last two years of this parliament - the chancellor's top line figure showed an overall rise of 0.6% over the five-year period of this Labour government. There are questions too over whether council tax bills might be increased in order to top up local government and police budgets. Ms Reeves told me in an interview after her speech that they won't, but she has predicated increases in police funding and local government funding coming locally, rather than from central government, so I will be watching how that will play out. Even with the increase in health spending - the NHS is getting a 3% boost in its annual budget - there are questions from health experts whether it will be enough for the government to hit a routine operations target of treating 92% of patients within 18 weeks. My point is that this might not be - to again quote Mr McDonnell - "mathematical austerity", but after over a decade where public dissatisfaction in public services has grown, the squeeze of day-to-day spending could make it hard for the chancellor to persuade working people this is a government delivering the change for them. There is pressure to reverse some of the welfare cuts, and pressure to lift the two-child benefit cap, while the pressure to reverse the winter fuel allowance has already resulted in Reeves this week making a £1.25bn unfunded spending commitment (she will set out how she is paying for it at the next budget). Will voters feel the 'renewal'? Reeves told me on Wednesday there was no need for tax rises in the autumn because the spending envelope had already been set, and the money now divvied out. It's a very live question as to whether that can hold if the economy weakens. She did not rule out further tax rises when I asked her last week, while Treasury minister Emma Reynolds told my colleague Ali Fortescue on Wednesday night: "I'm not ruling it in, I'm not ruling it out." 👉 Listen to Sky News Daily on your podcast app 👈 The gamble is that, by investing in infrastructure and getting spades in the ground, and tilting limited public money into the NHS, the government can arrive at the next election with enough 'proof points' to persuade voters to stick with them for another five years. On Wednesday, the chancellor laid the foundations she hopes will turn the government's fortunes around. The risk is that voters won't feel the same by the time they are asked to choose.

Rachel Reeves has said this morning that the latest figures showing the UK economy has shrunk by more than expected are "disappointing". How much will this overshadow yesterday's major spending announcement? The chancellor has now planted Labour's fiscal flag in the sand - and spending mistakes from here on in certainly cannot be blamed on their predecessors. How will Labour react to a potential internal revolt over disability benefit cuts? And how will the party manage the politics around expected tax rises in the autumn?

Delivering her spending review, the chancellor also declared an end to the use of asylum hotels this parliament by investing in cutting the backlog and returning more people with no right to be in the UK - which she said would save taxpayers £1bn a year. Politics live: Reaction to spending review Ms Reeves acknowledged that almost 12 months on from Labour's landslide election victory, "too many people" are yet to feel their promise of national renewal. She said the purpose of her spending review is "to change that", with departmental budgets to grow by an average of 2.3% a year in real terms until 2028-29. Key settlements include: • NHS: The health service gets £29bn for day-to-day spending - a 3% rise for each year until the next general election;• Housing: £39bn over the next 10 years to build affordable and social housing;• Defence: Spending will rise from 2.3% of GDP to 2.6% by 2027, made up of an £11bn uplift on defence and £600m for security and intelligence agencies;• Science and tech: Research and development funding will hit £22bn, with AI plans getting £2bn;• Transport: £15bn for new rail, tram, and bus networks in the North and the West Midlands, a new rail line between Liverpool and Manchester, and a four-year settlement for TfL, plus the £3 bus fare cap extended to 2027;• Nations: Scotland gets £52bn, Northern Ireland £20bn, and Wales £23bn, including for coal tips;• Education: Free school meals extended to 500,000 children, while the extra £4.5bn per year will also go on fixing classrooms and rebuilding schools;• Nuclear: A £30bn commitment to nuclear power, including £14.2bn to build Sizewell C plant in Suffolk and £2.5bn in small modular reactors;• Prisons: 14,000 new prison places will be funded with a £7bn injection;• Police: 13,000 more police officers will be paid for with £2bn. Read more: The key announcements Many of Wednesday's announcements have been front-loaded by cash injections made since Labour took office, meaning that from 2025-26 the increase is a more modest 1.5% on average. Over the course of the whole parliament, it equates to spending £190bn more on the day-to-day running of public services and £113bn more on capital investments than under the previous government's spending plans, the chancellor said. Ms Reeves drew a distinction between her review and the Tories' austerity agenda in 2010, saying they cut spending by 2.9%. She said austerity was a "destructive choice for the fabric of our society" and "different choices" would be made under Labour. However, while overall departmental spending will increase day to day, some departments face a squeeze. Home Office budget squeezed This includes the Home Office, whose spend will reduce by 1.4% over the next three years, including daily spend and capital investments. Daily spend covers the daily running costs of public services, while capital investment is spending by the state on the creation of fixed, long-term assets, such as roads and railways. Combined, the Foreign Office and Department for Environment, Food and Rural Affairs (DEFRA) also face reductions, as does the Department for Digital, Culture, Media and Sport, and the Cabinet Office. Paul Johnson, the director of the Institute for Fiscal Studies, said 3% a year increases in NHS spending "does mean virtually nothing on average for current spending elsewhere". Ms Reeves said the cash boost for the NHS would fund more appointments, more doctors and more scanners. She used this to draw dividing lines with Reform UK, saying they have called for an '"insurance-based system" whereas Labour created the NHS, protected the NHS and under this government would "renew the NHS". Read more:The spending review: Five things you need to know Speculation of tax rises Ms Reeves said she was able to raise the money through decisions made in her autumn budget and spring statement, which saw taxes raised by £40bn and cuts made to the welfare budget. However, the Tories said the review "isn't worth the paper it's written on" and further tax hikes will be needed. Shadow chancellor Sir Mel Stride said that "this is the spend-now, tax-later review", adding Ms Reeves "knows she will need to come back here in the autumn with yet more taxes and a cruel summer of speculation awaits". The Liberal Democrats said the "smoke and mirrors" spending review would leave a black hole in social care as local government budgets remain at breaking point. "Putting more money into the NHS without fixing social care is like pouring water into a leaky bucket," said the party's Treasury spokesperson Daisy Cooper.