UK Spring Statement

After a seismic first Budget in which the new Chancellor increased government spending by almost £70bn p/a, just five months later she has announced spending cuts of c.£15bn per annum – the first overall fiscal tightening since 2016.

Faced with a deteriorating fiscal outlook, the result of geopolitical instability, sluggish growth and rising borrowing costs, and having left little room for manoeuvre within her self-imposed fiscal rules, the Chancellor faced three choices: cut spending, raise taxes or borrow more and break her fiscal rule to cover day-to-day spending with taxation. Having hiked taxes by £40bn in the Autumn, and reluctant to breach her ‘iron clad’ fiscal rules so soon after imposing them, Reeves opted for spending cuts. 

The big questions now flowing from the Spring Statement are: 

1. Can the government deliver the spending cuts? 
2. Will the government’s wider reforms help generate growth?
3. What does this mean for the Autumn Budget?

The Government’s existing spending plans already looked implausibly tight for the second half of the decade, with ‘unprotected’ departments (i.e. outside the NHS, schools, defence etc.) facing real terms cuts averaging 1.3% between 2025-26 and 2029-30.  The lower spending totals announced today stretch plausibility further, particularly in the face of rising ‘demand’ in areas such as social care, prisons and defence. There is also growing unease on the Labour backbenches about the scale of planned welfare cuts, and Labour will face a fight with the trades unions in respect of both upcoming public pay settlements and planned cuts to the civil service. Delivering the planned cuts in full will be challenging, to say the least.

In more positive news for the Government, the OBR now forecasts that the Government’s planning reforms (i.e. changes to the National Policy Planning Framework for residential development) will increase real GDP by 0.2% by 2029-30 and by over 0.4% by the middle of the next decade; and a further boost could come from measures in the Planning and Infrastructure Bill which have yet to be assessed. However, the OBR also hasn’t yet assessed the impact of the Employment Rights Bill, although it notes the Bill will likely have “material, and probably net negative, economic impacts on employment, prices and productivity”. The assessment will be made at the Autumn Budget.

All of this means the Government faces a challenging run-up to the Autumn Budget – and businesses face a period of continued policy uncertainty. Between now and the Spending Review in June, when the Chancellor allocates the available budget to individual government departments, we can expect continued push back from Cabinet ministers to cuts to their budgets. Similarly, backbench Labour disquiet about welfare cuts will continue to grow. And if growth continues to disappoint, having likely reached the limits of spending cuts her party is prepared to stomach, speculation will soon turn to whether the Chancellor will need to raise taxes or tweak her fiscal rules to allow more borrowing in the Autumn.  

Public Spending

As a result of the public spending reductions set out in the Spring Statement, the Chancellor now expects total public spending (as a % of GDP) to be lower in every year of the forecast period relative to the totals set out at the Autumn Budget; and for public spending as a proportion of GDP to decline in every year of the forecast period. 

Debt / borrowing and the fiscal rules

Relative to the projections published in the Autumn Budget, the Government anticipates borrowing an additional £47.6bn across the forecast period, mainly driven by increases in debt interest and lower projected tax receipts. The OBR estimates the Government will spend 3.7% of GDP on debt interest payments in the current financial year, rising to 3.8% in 2029-30.

Without making cuts to public spending, the Chancellor would have breached her ‘stability rule’ by £4.1bn by 2029-30.  However, as a result of the cuts, the OBR projects that she will now continue to meet her rule with headroom of £9.9bn.  The Government is also projected to meet its investment rule.

As a reminder, the two fiscal rules are:

‘Stability rule’

Day-to-day spending must be covered by tax revenues (i.e. only borrowing to invest) in 2029-30. 

‘Investment rule’

Net debt must be falling as a proportion of GDP by 2029/30. Net debt measure is Public Sector Net Financial Liabilities (PSNFL).

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