Rachel Reeves, in her latest Spring Statement to lawmakers, has announced significant adjustments to the United Kingdom's fiscal policy, including increased taxes on businesses and employers. This decision is to fill a hole in public finances and enable more investment in public services. The Treasury’s fiscal headroom has been largely eroded since the Autumn announcement, leading to expectations of costing cuts worth billions.
OBR Reeves issued her statement against the backdrop of the OBR’s economic forecasts. All of these forecasts foresee an increase in inflation. Expected inflationary pressure will almost certainly make the country’s borrowing needs worse in the coming two years. These drastically increased interest payments will bring additional, mounting pressure to an already difficult economic environment.
"The Spring Statement will see an increase in required borrowing over the next two years due predominantly to higher interest payments," stated Moyeen Islam and Jack Meaning.
In her address, Reeves made it clear that she’s committed to upholding her fiscal guardrails. She has ruled out any tax increases for the time being, even as calls increase to reduce public spending or revise fiscal rules with the U.K.’s new borrowing costs. Those draconian fiscal rules, first announced in the “Autumn Budget,” are still the bedrock of her economic strategy. Nonetheless, economists believe that more taxes may be implemented later this year.
The OBR's economic forecast indicates a downgrade in growth, a factor that Reeves cited as a reason for immediate action to stimulate the economy. Even with all these challenges, it hasn’t dissuaded Reeves from doubling down on sticking with her self-imposed fiscal guardrails.
"I am not satisfied with these numbers. That is why we on this side of the house are serious about taking the action needed to grow our economy," Reeves asserted during her address.
Recapping the session, Reeves highlighted that the economy is expected to be nearly 1 billion dollars larger by the end of the forecast period. This increase is well above the previous OBR predictions, as those projected during October’s Budget announcement. At the time, the OBR had forecast a current budget surplus in FY29/30 of around £10 billion.
"By the end of the forecast, our economy is larger compared to the OBR's forecast at the time of the Budget," Reeves noted.
The Spring Statement focuses on growing the economy, protecting working people, and ensuring the nation’s security. Reeves is feeling more pressure than ever, with poaching distractions, soaring local borrowing costs, high inflation, among other factors. She’ll have to trim down public spending or change her fiscal tune. Amidst these pressures, she’s promised not to loosen her fiscal rules or targets.
In her budget announcement, Reeves surprised many by announcing extensive new cuts to spending. Her aim has been to focus the cuts on welfare and public sector redundancies, which will not begin until the second half of the parliamentary term post 2027.
"These savings will most likely be focused on welfare spending and public sector headcount, and delayed until the second half of the parliament, beyond 2027," explained Moyeen Islam and Jack Meaning.
Reeves then closed her remarks by emphasizing how quickly the global economy is changing. She asked lawmakers to recognize these changes and adjust to meet them.
"The world is changing," Reeves remarked, underscoring the need for agile economic strategies.