UK Spring Statement: Saving to meet the fiscal rules, but back for more in the Autumn?

The Office for Budget Responsibility (OBR) revised down its growth forecasts for this year by 1.0% (to 1.0%). It revised up its forecasts for bond yields.

Neither of those things was good news for its public finance forecasts. Added that, since the OBR last came up with a set of forecasts, the monthly public finances data has been worse than expected. The data was tracking a substantially bigger deficit for the fiscal year just ending than the OBR had been forecasting. So, in short, the starting point was not good for Chancellor Reeves yesterday.

Putting the planning reform point to one side, spending cuts are not generally the best news for economic growth.

After all that bad news from the OBR–and before changing any policies – if the chancellor still wanted to meet her fiscal rules and with the same amount of headroom as she had before (that headroom was about £10bn before she broke her day-to-day spending rule), this would leave the Chancellor needing to find about £14bn from somewhere. In the event Chancellor Reeves chose to restore all that headroom, achieving this in the forecasts through welfare spending cuts, through spending less on aid, through increased tax compliance and through promising less spending later in the parliament. She was also helped by the OBR ‘scoring’, the government’s previously announced planning reforms as positive for GDP growth (higher growth supports tax revenues in future years).

Putting the planning reform point to one side, spending cuts are not generally the best news for economic growth. In the event, however, there is some offset to this from investment spending and much of the planned departmental spending cuts/savings are pushed to the last couple of years of the forecast. The current budget rule says that the government cannot borrow to fund day-to-day spending. It does not restrict investment spending in the same way (the debt rule acts as a restraint instead). So while the chancellor has announced some spending cuts, she has also increased planned investment spending by £2bn in the current fiscal year, and by more than £3bn a year from 2027 to 2028. That includes more money for defence and for investment in order to save money later (investment in technology for example, to reduce government running costs). The government has explicitly cut spending in the aid budget in order to fund an investment-heavy increase in defence spending, so there is an element of moving spending from the ‘current’ to the ‘capital’ part of the government finances here.

The Debt Management Office announced that this coming fiscal year will see a net financing requirement of £304bn, of which £299bn will be gilt sales. Needless to say that is a lot (albeit less than some had feared). The overall fiscal figures have gotten a little worse: the OBR expects the fiscal deficit to be £12.1bn higher in 2025-2026, and to still be £3.5bn higher by 2029-2030 than in the October forecasts. The market reaction to this fiscal event, however, has ultimately been relatively muted so far.

All this leads us onto the Autumn Budget. As we head into the autumn, I think there is a good chance that the UK economy still looks a bit lacklustre. The OBR’s forecast for GDP growth still looks on the optimistic side of consensus once you get beyond this year. Inflation is likely to still be high in the autumn, constraining the Bank of England’s room for manoeuvre. It seems reasonable to expect that US policymaking will still be presenting a challenge to the global (never mind the UK) economy.

Meanwhile, the chancellor has still only left herself £9.9bn headroom against the day-to-day spending fiscal rule. The OBR describes the fiscal rules as still being met by “small margins”. The OBR notes too, that the headroom could be wiped out by a 0.6pp rise in the Bank of England policy rate and gilt yields. They also point out that if the US ends up with an average tariff rate with the rest of the world which is 20pp higher, this will have much the same effect on the current budget balance. According to the OBR, based on simulations, the probability of meeting the current budget rule is 54%.

So, there is a good chance that we’ll see more fiscal tightening action from Reeves at the Autumn Budget. This time around, it will be a full Budget, so we can expect that tax changes as well as spending measures will be in the mix. For now, though, this Spring Statement doesn’t leave me inclined to change my UK economic forecasts at this stage. For more on the current forecasts, see Uncertainty Anxiety. 

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