Spring Statement 2025: Key takeaways

Against a backdrop of high geopolitical uncertainty and weak economic growth at home, Rachel Reeves delivered her Spring Statement to the House of Commons on Wednesday 26 March. The Government’s fiscal watchdog, the Office for Budget Responsibility (OBR), confirmed what we already knew: that the Chancellor’s wafer-thin fiscal headroom –c.£9.9bn on a total Budget of £1.3trn – had more than evaporated, leaving instead a £4.1bn deficit. The OBR also downgraded its predictions for economic growth this year. Reeves’ red-line of not tinkering with her self-imposed fiscal rules left her with difficult choices to make.

The fragility of Reeve’s position was recast later the same day with President Trump’s announcement of a new 25% import tariff on autos – a significant UK export to the US.

When Labour came to power last year, it stated its intention to hold only one significant ‘fiscal event’ each year, hoping the Spring Statement would be an unexciting mid-year update. But the OBR provides bi-annual updates and forecasts and its latest one, confirming the Chancellor’s fiscal buffer was gone, imbued this Spring Statement with more significance than the government would perhaps have liked. Ultimately the magnitude of this update was dwarfed by last year’s Autumn Budget. But since then, a sluggish UK economy, higher-than-expected borrowing costs, large debt servicing costs, and Reeves’ explicit desire to keep to her fiscal rules have all conspired to mean that the Spring Statement was much anticipated. 

The Chancellor’s fiscal rules are twofold: not to borrow to fund day-to-day public spending (ie spending is covered by tax receipts) and to have debt as a share of UK GDP falling by the end of the current parliament in 2029-30. However, these promises are based on assumptions and forecasts in the OBR’s periodic reports and dependent on both growth materialising at a certain level and tax receipts being fully realised – variables which the Chancellor does not control.  

On the growth front, it is fair to say that economic expansion since last year’s general election has underwhelmed: UK GDP rose by just 0.1% in the second half of 2024, bringing the calendar year growth to 0.8%. At the Autumn Budget, the OBR believed GDP growth would be 1.1% in 2024 and 2% in 2025. Now Reeves confirmed that the OBR had halved its 2025 growth forecast to 1% (still higher than the 0.7% forecast by the Bank of England). Ultimately, lower realised and forecast economic activity leads to smaller flows into Treasury coffers and a reduced ability to meet stated spending commitments and remain within the parameters of the Chancellor’s fiscal rules.  

However, given the UK’s level of debt post-pandemic, borrowing costs have the biggest impact on the amount of leeway the Treasury have to work with at each ‘fiscal event’. The OBR recently forecast that paying interest on debt is due to be £105.2bn in 2024-25 and will rise to £131.6bn by 2029-30, as the government continues to run a budget deficit. Compared to last October, the OBR now expects debt interest spending to be higher by an average of £5.9bn a year and by £9.4bn in 2029-30, due to interest rates remaining higher-for-longer than they anticipated.

The rate of inflation has a material impact on the level of debt servicing costs: all things equal, higher inflation means higher interest rates for longer, also impacting the cost of index-linked bonds. The Chancellor received a small boost on the morning of the Spring Statement with the latest UK inflation print coming in lower-than-expected at 2.8% for February - down from 3% in January. The OBR reaffirmed its expectation that inflation would hit 2% from 2027, albeit averaging a higher 3.2% this year than the 2.6% they earlier expected.

The Government had long-signalled that spending cuts rather than tax rises would be the primary focus of the Spring Statement. A government-wide spending review has been underway since the Autumn Budget, seeking to reset departmental budgets over the coming years, and £5 billion of welfare cuts had already been announced. Nevertheless, Reeves was forced to find additional savings after the OBR said the government had overestimated the impact of changes outlined by Work and Pensions Secretary, Liz Kendall just a matter of days ago. 

Prime Minister Kier Starmer had also already announced the abolition of the government’s two largest quangos, NHS England and the Education Skills Funding Agency, in order to improve efficiency and lower day-to-day government spending. And in an effort to save more by the end of the decade, the Chancellor announced that she would bring forward £3.25bn of investment to reform public services. This includes voluntary ‘exit schemes’ to reduce the size of the civil service and investment in AI tools and other technology improvements, targeting a 15% reduction in administrative costs by 2030. 

The Chancellor kept to her promise not to announce any further tax rises, but she did pledge to further crackdown on tax evasion, with an ambition to increase the number of tax fraudsters charged each year by 20%. Reeves stated that this additional push to tackle tax evasion will deliver total Treasury savings from these measures to £7.5bn. 

Following the Spring Statement the OBR published its fiscal predictions in full, stating that, collectively, the government’s welfare reforms, tax evasion clampdown, and cuts to day-to-day departmental spending had restored the Treasury’s fiscal headroom in full, back to the £9.9bn surplus at the time of the Autumn Budget.  

Labour has set its stall out on fostering economic growth, and the Chancellor was keen to highlight her belief that the spending cuts announced would be offset by additional long-term investment to grow the economy, with a particular focus on planning reform to facilitate a faster pace of housebuilding and further measures to support defence spending. 

Reeves highlighted the OBR’s assessment of Labour's intended planning reforms - announced last year - would see housebuilding rising to a 40-year high. Changes to mandatory housing targets for councils and making it easier to build on green belt land could mean more than 1.3 million homes in the UK within the next five years, taking the government within "touching distance" of its target to build 1.5 million homes in England this parliament. The Chancellor noted that the OBR believes these reforms could bring about “the biggest positive growth impact that the OBR have ever reflected in their forecast, for a policy with no fiscal cost". Success on this front has the potential to be transformative for the fortunes of the Chancellor, but there are numerous obstacles ahead. The OBR warned that its estimates were uncertain, not least due to factors like an insufficient number of construction workers, while local opposition could still hinder progress. 

Nevertheless, the OBR factored the government’s planning reforms into its forecasts for economic growth. Despite the halving of this year’s growth forecast, the Chancellor announced that the OBR has upgraded its forecasts for every year until the end of the decade as a result the planning reforms announced last year, to 1.9% next year, 1.8% in 2027, 1.7% in 2028 and 1.8% in 2029 – stating that the reforms could permanently increase the level of real GDP by 0.2% by 2029-30 and by 0.4% over the next 10 years. 

The stagnation which the UK economy has come close to since the election has in no small part been due to factors beyond the Chancellor’s control; global economic uncertainty has contributed to stubborn inflation and more elevated borrowing costs. However, some may argue that the UK’s economic difficulties have been self-inflicted by the current government, with the increase in employers’ National Insurance contributions cited as a drag on business investment and at odds with the growth narrative. Any hopes that the Spring Statement would include measures to alleviate the burdens faced by businesses were dashed, with the government seemingly pinning its hopes on pre-announced regulatory reforms – to sectors such as AI and financial services as well as planning. 

Ultimately, the Chancellor has emerged from the Spring Statement with the same wafer-thin level of fiscal headroom as she had at the Autumn Budget. It remains distinctly possible that the Chancellor’s steadfast commitment to her “non-negotiable” fiscal rules will come increasingly into conflict with her promise not to raise taxes on “working people” through income tax, VAT, or employee National Insurance. As these taxes together amount to c.60% of tax revenues, the Chancellor may find her options limited if she is unable to deliver the economic growth the government has made such a key pillar of its agenda. 

Subsequent news that President Trump will tax foreign vehicle imports by 25% shows how global forces may reshape Reeve’s fortunes if the UK cannot negotiate a carve-out or special terms. UK car exports to the US are worth around 0.2% of GDP. Chair of the OBR, Richard Hughes, has stated that the worst-case scenario here could wipe out the ca. £10bn of fiscal headroom that Reeves has just set aside again. Rarely has a Chancellor’s forecast been so rapidly tested.

 

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