The Chancellor of the Exchequer, Rachel Reeves, delivered her Spring Statement last week in which she outlined the government’s economic plans, including spending decisions, tax policies and efforts to boost growth while managing public finances.
The Statement came on the back of the latest forecasts prepared by the Office for Budget Responsibility (OBR). The forecasts showed a more challenging outlook than was the case last autumn. The OBR cited falls in business and consumer confidence, rising European energy costs, increased government borrowing costs and global uncertainties from issues such as the war in Ukraine and trade tariffs.
As a result, the OBR have downgraded their forecast of GDP growth to 1% for this year. Last autumn they predicted growth of 2%, so this is a significant adjustment in their expectations. However, their projections of growth in the next four years have been upgraded, suggesting that they see the long-term more positively.
The OBR have forecast inflation to average 3.2% this year, up from 2.6% in their previous estimate. They predict that inflation will fall to 2.1% in 2026 and 2% in 2027.
The forecasts also showed that without intervention, public finances would fall short of the targets set at the Autumn Budget.
Much has been made in recent weeks of the Chancellor’s self-imposed stability and investment rules, and whether she will be able to maintain them in the face of the aforementioned challenges. However, the Spring Statement confirmed the Chancellor’s commitment to the rules. Governments often use these fiscal rules to provide credibility to financial markets.
This decision meant there was pressure on the Chancellor to either raise taxes or reduce spending to cover the forecast shortfall. In good news for businesses, the Chancellor made no direct increases to taxes. She confirmed her intention to have only one major fiscal event a year and so further tax changes will wait until the 2025 Autumn Budget. Instead, the Statement outlines a number of plans to reduce public spending, including welfare reforms, and reduced day-to-day spending in government departments. In addition, it is clear the Chancellor has adopted a policy of growing the economy and is looking at ways to promote that, including by supporting increased homebuilding activity. Economic growth is aimed at ‘putting more money in people’s pockets’, but it also indirectly boosts the revenues the government receives. The OBR have confirmed that the policies outlined in the Spring Statement largely restore the public finance targets set last Autumn.
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