How do you know it’s Spring? The tulips and daffodils are in bloom, the days get longer, the fields are filled with bleating lambs – and of course, the Chancellor delivers the Spring Statement! It’s a time for the government to set the stage for the year ahead, and often serves as a precursor to larger budgetary decisions later on, but what did we actually hear this time?
The take-home message from the Statement is that headroom is tight, has been more than wiped out since the Autumn budget and could be wiped out again given the potential for global uncertainty this year. If the gap fill measures announced this week don’t hold up by the Autumn budget, then we could see more spending cuts and/or tax hikes down the line!
Let’s take a look at the Spring Statement in a bit more detail.
Many expected it to be a quiet affair, especially given that Rachel Reeves, the Chancellor, had committed to just one fiscal event a year, and we certainly got that in autumn! So, we weren’t expecting any big announcements, and, true to form, the Spring Statement didn’t deliver many surprises.
Instead, this statement was all about proving fiscal responsibility. The Government are clearly focused on ensuring that they have enough fiscal headroom – enough room to manoeuvre and allow a margin of error – whilst meeting their own fiscal rules.
The stability rule is the key here, and the Government have set themselves the benchmark of ensuring the current budget is on course to be in balance or surplus by 2029/30. This essentially means they want day-to-day costs to be met by revenues, rather than having to borrow to meet those costs.
Reeves left herself fiscal headroom of £9.9bn by 2029/30 following the Autumn Budget, which has since done an about-turn and evaporated into a £4.1 billion deficit due to higher interest payments on Government debt and lower receipts. Whilst the government paints a picture of economic optimism, falling inflation and interest rates, the global situation remains unstable. It may not take a great degree of global uncertainty – economic shifts, tariffs or geopolitical tensions – to erase that headroom again.
This is why the independent Office for Budget Responsibility (OBR)’s report is so critical – the forecast and accompanying commentary effectively hold the government to account, or mark their homework. GDP growth forecasts for this year have been slashed from 2% to 1%, and gilt yields (the cost of government borrowing) have increased by about half a percentage point. This, in addition to lower-than-expected receipts, has resulted in a squeezed fiscal headroom. Therefore, some risk factors have already been accounted for, but it’s a fine balance. Small changes in global or domestic data could again lead to a bigger deficit, triggering urgent policy shifts.
The government will be publicly assessed by the outcome of the OBR report, and bound by their own fiscal rules, meaning that the changes in policy and spending are largely driven by balancing the books, rather than deciding what are actually good policies to put in place!
That being said, you may now be asking, “Well, what actually was announced to balance the books?” The government focused on some key areas in this statement: strengthening their scheme to crack down on tax avoidance, raising £1billion, “the largest increase in defence spending since the end of the Cold War”, and further cuts to benefits. Additionally, there is a strong push to reduce economic inactivity, encouraging more people into the workforce. This follows on from the government’s green paper last week that stated savings of £4.8bn will be made in 2029/30 through reforms to incapacity and disability benefits.
Finally, public sector reform aims to reduce Government departments’ administrative budgets by 15%, a saving of £2.2bn in 2029/30.
What’s the takeaway from this week’s Spring Statement? The fiscal headroom is tight and could be wiped out by global uncertainty this year. If this were to happen, we could see more spending cuts and/or tax hikes down the line, leading to months of speculation ahead of the Autumn Budget later in the year.
One thing we do know for sure, is that you can rely on us to keep you informed.
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See you next time.
