The UK's economic landscape is yet again proving to be an intriguing puzzle. As Chancellor Rachel Reeves prepares for the Spring Statement on Wednesday, March 26th, the picture emerging is less about a traditional budget and more about small measures to navigate a challenging forecast.
Central to the Spring Statement will be Office of Budget Responsibility's (OBR) updated forecast – one that is unlikely to bring cheer to listeners nor give spending headroom to the Chancellor. The forecast is also widely expected to downgrade prospects for UK GDP and confirm that the government’s borrowing costs are higher than previously expected. By implication, navigating against economic headwinds while adhering to Labour’s promise to not raise employees NIC, income tax, or VAT will become even more thorny, especially if the Chancellor wants to also stay committed to her "non-negotiable" fiscal rules.
The economic context remains challenging. Growth has been elusive; business confidence has slumped, and the UK’s borrowing costs have increased. The Chancellor’s response has been to cut benefits and Wednesday’s announcements are likely to provide further details on changes to Personal Independence Payments and spending cuts in Whitehall, the latter amounting to £2.2 billion by 2029-30. Accusations about austerity have already been raised, which the Chancellor is keen to dismiss. Whilst immediate tax rises have been ruled out, some economists believe that the option is not off the table and there could be tax rises, particularly to meet rising defence spending. Indeed, the Chancellor might prepare the ground for potential rax rises later this year or in 2026 by explaining how the geopolitical situation is different to what it was six months ago.
Of particular concern will be how substantial the downgrade to the OBR's forecast for 2025 and 2026 will be and whether it materially damages the economy and tax revenues. Although there have been announcements on planning reform and support for Heathrow expansion, the lack of clarity and substantive detail on the government’s infrastructure plans, industrial strategy, growth plans, and international trade policy is not lost on economists and business. These are vital to the UK’s economic progress and irrespective of whether the Spring Statement will pack major announcements or be a “not a budget” event, what we should demand of the government are answers to critical economic questions and a roadmap for “growth, growth and growth”. For the lack of growth is all too noticeable.