Chancellor Rachel Reeves is set to unveil a ‘Spring Statement’ later this month, with the Office for Budget Responsibility (OBR) releasing new forecasts for the UK economy on 26 March. Unlike the major announcements made during the Autumn Budget last year, this Spring Statement will be a more subdued event. However, it will still provide valuable insights into the future of the UK economy.
The OBR’s latest projections will include forecasts for inflation, growth, and interest rates. These forecasts are crucial as they determine whether the government has adhered to its fiscal rules. Reeves has committed to two main rules: the ‘stability rule,’ which requires day-to-day costs to be covered by revenues by 2029-30, and the ‘investment rule,’ which mandates that public debt should decrease as a percentage of GDP by 2029-30. In October, it seemed that the government was on track to meet both rules, albeit with limited headroom.
However, the updated OBR forecasts are expected to show a narrower headroom. Higher interest rates and gilt yields since October have increased the cost of servicing government debt, potentially reducing the headroom. Additionally, lower growth figures could lead to reduced tax receipts, further squeezing the government’s fiscal position. A downgrade in productivity growth assumptions could exacerbate the deficit, putting more pressure on the chancellor.
Defence spending is another concern, with the government pledging to increase spending to 2.5% of GDP by 2027. This additional expenditure will need to be factored into future fiscal decisions. Reeves may face the dilemma of implementing more tax hikes or spending cuts to maintain fiscal credibility, especially after recent bond market volatility.
While the chancellor may need to introduce new measures to address the fiscal challenges, constraints such as committing to one major Budget per year limit her options. Freezing income tax thresholds and the personal allowance for an extended period could provide some relief, but it may contradict previous commitments and pledges. Analysts suggest potential cuts to welfare spending and public expenditure to restore fiscal headroom, but the long-term sustainability of such measures remains uncertain.
Ultimately, the Spring Statement will shed light on the government’s fiscal outlook and the challenges ahead. While the chancellor may make adjustments to the fiscal rules this spring, tougher decisions on tax increases and spending cuts may be inevitable in the future. The road to fiscal stability may require difficult choices, but it is essential for the long-term health of the UK economy.