What will be in the chancellor's Spring Statement?

The UK Chancellor of the Exchequer is set to deliver an economic statement on March 26th, alongside the publication of an economic forecast, at which time she will update her plans for the UK economy. Chancellor Rachel Reeves has previously ruled out further tax increases, but she faces tough choices given the performance of the UK economy and the international situation. This requires careful consideration of both domestic and global factors.

The UK's Office for Budget Responsibility (OBR), which oversees the government's spending plans and performance, will release its forecast for the UK economy on March 26th (Wednesday). This forecast will also provide estimates on the cost of living for households, as well as an assessment of whether the government is on track to meet its self-imposed borrowing and spending rules. Reeves will present the agency's key findings to Parliament, along with her Spring Statement on the economy. The OBR's analysis is crucial for informing policy decisions.

Reeves has pledged to hold a major economic event – a Budget – each year to "provide stability and certainty for families and businesses about tax and spending changes." This implies that there will be no major policy announcements on March 26th, but this does not preclude some decisions being made before then. Due to poor economic performance and global factors such as US trade tariffs indirectly impacting the UK, there is growing speculation about whether the Chancellor will break her own borrowing rules. These rules are intended to maintain fiscal discipline.

The OBR's forecast is expected to confirm that the £9.9 billion fiscal buffer needed to meet its budget rules by the 2029/30 financial year has been exhausted. Reeves has repeatedly stated that her rules are "non-negotiable." Her two main rules are: not to borrow for day-to-day public spending; and to get debt falling as a share of national income by the end of this Parliament. Ahead of the Spring Statement, the Treasury has already drawn up plans to cut billions of pounds in spending. It is understood that welfare spending will bear the brunt, but other government departments' budgets will also be cut. The government has been concerned about the rising number of welfare claims, and Reeves has previously pledged a "fundamental" reform of the welfare system. This reform aims to improve efficiency and target resources effectively.

The Treasury has blamed rising government borrowing costs on global economic policies and geopolitical uncertainty resulting from the conflicts in Ukraine and the Middle East. Other potential announcements include: lowering the annual £20,000 tax-free allowance in cash ISAs (Individual Savings Accounts) to encourage more people to invest their savings in stocks; confirmation of how international aid funding will be reallocated to defense, following the Prime Minister's announcement that UK defense spending will increase to 2.5% of national income by 2027. Such measures reflect shifting priorities in the face of global challenges.

Government sources have been keen to state that this event is not a major one, as it will not include tax increases, only spending cuts. However, a controversial tax policy could be announced if Reeves decides to extend the freeze on the thresholds at which people start paying different rates of income tax. This policy is known as a stealth tax, as it takes effect over time, as people's wages rise and they are dragged into paying more tax, without the rates actually increasing. The previous Conservative government froze the thresholds until April 2025, but according to Pantheon Macroeconomics consultancy and Citigroup investment bank, the Chancellor may decide to extend the freeze, raising around £7 billion a year. Reeves decided against extending the threshold freeze in her first budget, arguing that doing so "would hurt working people" and "take more money from their pay packets." This highlights the political sensitivity of such measures.

Recent data indicates that the UK economy is growing slowly – not shrinking, but not growing as fast as hoped. According to the latest official figures, the economy grew by just 0.1% between October and December 2024. When the economy grows, more businesses can hire additional workers or raise wages. More profitable companies also pay more tax to the government, which can be used for public services. In addition to slow growth, prices are rising faster than expected. The current rate of inflation is 3%, above the Bank of England's 2% target, and is expected to rise further. Inflation could determine whether interest rates are lowered further from their current level of 4.5%. Higher interest rates mean higher borrowing costs for loans, credit cards and mortgages, but they also offer better returns on savings.

Businesses are expected to face further cost increases in April, when employers' National Insurance contributions rise. These costs are likely to be passed on to consumers. Pressure on the Chancellor's tax and spending plans has also increased as the government's fiscal surplus has fallen short of official forecasts, prompting economists to speculate that she may breach fiscal rules as things stand. Due to concerns about the outlook for the UK economy, UK borrowing costs soared in January, threatening Reeves' economic plans. Costs have since fallen back somewhat, but remain higher than they were a year ago. Reeves has also warned that a potential global trade war, even if tariffs are not directly targeted at the UK, would reduce growth and increase inflation. This underscores the interconnectedness of the global economy.