Analysis of the Chancellor’s Spring Statement March 2025

It isn’t easy being the Chancellor of the Exchequer in 2025. The Chancellor is restrained by two devices created by former Chancellors to reassure the markets. The first device is Gordon Brown’s “Golden Rule”, (the rule that says the current budget should balance) which was created to help New Labour win the 1997 election. The second device is the Office for Budget Responsibility, created by George Osborne in May 2010 to take economic forecasting out of the hands of optimistic politicians and put it into the hands of pessimistic economists.

But the greatest restraint on the Chancellor of the Exchequer is the UK’s financial position. Any organisation (or individual) which carries a debt load equal to a year’s income has to tread carefully.

As a consequence, there are few surprises in budgets anymore. The last Chancellor to provide surprises was Kwasi Kwarteng. On 23 September 2022 his “mini-budget” was well received by the press, but caused growing turmoil in the markets. Kwarteng was dismissed as Chancellor on 14 October after only 38 days in post, with the Prime Minister resigning six days later.    

For a country as indebted as the UK, the bond yield becomes a major KPI. Even a tiny upward movement in bond yields will change government plans. And that is what has happened. The UK has a debt mountain at £2.6tn, or 95% of the UK’s GDP. Simply servicing this debt costs £105bn a year, about 8% of total public spending.

The Treasury’s answer to the UK’s difficult financial position was to outsource economic planning and to stick to market-approved “fiscal rules”. This has been the governance framework for UK budgets since 2010. It is a corset, or straight-jacket, which imposes severe financial constraints on Government, but which is designed to reassure the bond markets that the UK Government will act responsibly and balance its books.

The flip side of these self-imposed rules, is that if a government appears to be in danger of breaching them, the financial markets will react with massive fury, as they did in September 2022.

Rachel Reeves has added to these restraints by reiterating repeatedly that two rules are “non-negotiable”. To Gordon Brown’s “Golden Rule” (which Reeves calls the “stability rule”) she has added the “investment rule” which requires net debt to fall by the end of the forecast period.

Today’s Spring Statement became necessary in January as gilt rates rose and the Stability Rule came under threat. Reeves had to make a choice between her commitment to the Stability Rule and her previous commitment to only hold one “fiscal” event per year. In the end she chose the former.

The Opposition have therefore naturally claimed that Reeves’ pledge to hold only one fiscal event each year (made in her “£22 billion black hole” speech of 29^th July 2024) has been broken by this Spring Statement. The pledge was much praised, (one fiscal event per year is standard practice in most other countries) but in retrospect this commitment was ambitious and has led to the Opposition getting an easy win by dubbing the Spring Statement an “Emergency Budget”. Reeves justified the Spring Statement by telling MPs that "the world has changed" since her first budget just under five months ago. The fact that the Spring Statement includes no tax increases makes the matter debatable. “What is the precise definition of fiscal event?” is a question best left to the philosophers.

Reeves faced several challenges coming into the Spring Statement:

Firstly, there was Donald Trump’s demand that the UK increase spending on defence. The government's pledge to spend 2.5% of GDP on defence by 2027 was confirmed. The Government will provide an additional £2.2bn in spending for the Ministry of Defence (MoD) next year – the largest sustained increase since the Cold War

Secondly to meet the stability rule. The increased cost of government borrowing has wiped out the Government’s fiscal headroom. The yield – in effect the interest rate – on 10-year UK government bonds has reached 4.6%, surpassing the levels during the most turbulent days of Liz Truss and Kwasi Kwarteng’s mini-budget. The OBR has confirmed that the very minimal headroom of £9.9bn which the chancellor kept in reserve has now been wiped out, leaving the chancellor £4.1 billion in the red. Reeve’s “Stability Rule” requires a surplus on current budget. Changes announced in the Spring Statement to fix this situation mean that the Government now expects to meet the Stability Rule, and achieve a budgetary surplus, by 2027-28.

Thirdly to meet the investment rule. The OBR has confirmed that net debt should start falling in the 2027-28 financial year.

What’s the economic outlook according to the OBR?

The OBR cut the 2025 growth estimate for the UK from 2% to 1%, but has upgraded its longer-term growth estimates from 2026

The OBR has forecast that the UK will be in a deficit of £36.1 billion in 2025-26 and £13.4 billion in 2026-27, moving to a surplus of £9.9 billion by 2029-30.

The OBR has forecast that tax as a share of the economy is forecast to rise from 35.3% of GDP this year to a historic high of 37.7% in 2027-28. The increase is due to the increase in employer NICs announced in the last budget, (which takes effect in April 2025) and also the freeze on income tax thresholds.

The OBR has confirmed that policy changes announced by the Chancellor today, including welfare reforms and cuts in day-to-day departmental spending, will “restore it to the £10bn surplus the chancellor had in October”.

The OBR also noted that this surplus would be wiped out "to almost zero" if the USA imposes tariffs on the UK.

Inflation will rise to an average of 3.2% next year, before the rate starts to fall. It is expected to reach the Bank of England's 2% target from 2027 onwards

Inflation is forecast to average 3.2 per cent this year, before falling to 2.1 per cent in 2026. Reeves said the Bank of England's target of 2 per cent is forecast to be met from 2027.

What are the headline spending changes announced today?

• Overall day-to day-spending across government will be cut by £6.1bn in 2029-30 based on what was previously expected.
• The most politically divisive part of the statement was Reeves’ commitment to Welfare cuts. The Government claim they have found £4.8bn of welfare cuts, but the OBR put the value of the cuts at £3.4bn. Cuts include tightening the eligibility criteria for PIP and scrapping incapacity benefits altogether for under-22s. According to the DWP, by 2029/30 there will be 3.2 million families who will financially lose as a result of the cuts, with an average loss of £1,720 per year. Expect real trouble for the Government from Labour MPs as these cuts start to bite.
• The Government will provide an additional £2.2bn in spending for the Ministry of Defence (MoD) next year. This is being funded from existing Treasury reserves and the already announced cuts to foreign aid.
• Overseas aid will be reduced to 0.3% of GPD, saving £2.6bn by 2029/30.
• £600m to train up 60,000 new construction workers
• State pension triple lock - 4.1% increase in April 2025
• £2bn investment in social and affordable housing
• Confirmed backing for a third runway at Heathrow
• UK Export Finance will see £2 billion of increased capacity “to provide loans for overseas buyers of UK defence goods and services".

What are the regulatory changes announced today?

• Planning reforms - including reintroducing mandatory housing targets and bringing 'grey belt' land into scope for development - will help build over 1.3 million homes in the UK over the next five years and bring the Government 'within touching distance' of its pledge to build 1.5 million more homes in England.

What are the headline tax changes announced today?

• No new taxes were announced. Changes to taxes will be unveiled in the Autumn Budget.
• The Treasury in its Spring Statement document has revealed it is considering reforms to cash Isas, after weeks of speculation to “get the balance right between cash and equities”
• However “fiscal drag” (whereby tax thresholds remain frozen, dragging more people (including pensioners and those on the National Living Wage) into paying tax, or higher rates of tax) is always with us and will result in tax rises for many people in April 2025.
• Penalties for late payment of income tax under self-assessment are to double to 10% from 1 April 2025, with further rises in the penalty the longer the tax remains unpaid.

What’s next?

• June – The Spending Review - The Government's first multi-year spending review will set out departmental budgets between 2026/27 and 2028/29.
• October – The Budget – This is the main annual fiscal event at which the Government publishes its proposals for changes to taxation.

A selection of commentary on the Spring Statement

• “Rachel Reeves course-corrected the Autumn Budget—and in doing so, road-tested the new fiscal rules for the first time.”  Barret Kupelian, Chief Economist at PwC UK
• “This (the welfare cuts) will have quite a catastrophic impact on some of the most vulnerable people, marginalised people, in our community - people that Labour needs to protect.” Rachael Maskell MP
• “Once again, fiscal retrenchment is heavily backloaded to the final two years of the forecast…It is clear that the updated fiscal rules are not yet delivering the necessary stability for departmental budgets and therefore for government policy.” Anna Leach, the Chief Economist at the Institute of Directors
• “If she (Reeves) and her colleagues do not urgently change course on taxation and employment laws then the economic picture will remain bleak for many years to come.” Tom Clougherty, Executive Director of the Institute of Economic Affairs