The original intention was that today’s Spring Statement would be a non-event. Rachel Reeves had made it clear that she would do just one major fiscal event a year – an autumn Budget at which the big decisions on the public finances would be made. The Office for Budget Responsibility (OBR) is required to produce an economic and fiscal forecast twice a year, but a Spring Statement need not be accompanied by any policy measures. The Chancellor would get to her feet in the House of Commons, announce the OBR’s numbers, deliver her economic message and sit down.
It has not quite worked out like that. At her last Budget, Reeves gave herself next to nothing in terms of headroom against her fiscal rules (£9.9bn or just 0.3 per cent of GDP). Unless she was moderately lucky (and she has not been), there was always a good chance that the OBR would declare that her rules would be broken. Measures might have to be taken to ensure her rules were complied with. As a consequence, a Labour chancellor is in the uncomfortable (but by no means unprecedented) position of announcing cuts in welfare and departmental spending.
The criticism from the left is that she is too constrained by her rules and that, at the very least, she could wait until the autumn to address the fiscal situation – that the belt tightening is either unnecessary or premature. They point to Germany where the incoming Christian Democrat chancellor Friedrich Merz has relaxed the fiscal rules to allow higher defence spending. If Germany can do it, why can’t we, they ask.
Reeves is wise to reject the argument. A large part of our fiscal problem is that we are paying over £100bn a year in debt interest. Increasing the debt and increasing the interest we pay on that debt (a probable consequence of a looser fiscal policy) is not a sustainable way to address our economic problems. In the context of an ageing population and expectations of higher defence spending, the markets would be unforgiving.
This leaves Reeves with the options of increasing taxes or cutting spending. Her choice in October was to increase taxes by £41.5bn while providing a substantial (albeit short-lived) increase in spending. This time, she has left taxes untouched while cutting unprotected departments in future years (day-to-day spending falls by 0.8 per cent from 2026-27 onwards). It leaves the spending profile looking unbalanced with a risk that the years of plenty will result in wasteful expenditure, followed by the years of scarcity delivering cuts that store up long-term problems. Avoiding the latter problem will be a task for the Spending Review, which is looking very challenging for many departments.
This is one example of political pain deferred. It is only when the broad numbers set out today are translated into specific policies that one will get a real sense of what is necessary to comply with the current spending plans.
The bigger point is that Reeves has – once again – left herself very little headroom (£9.9bn again). Come the autumn Budget, there is much that could go wrong. The UK might escape US tariffs, but only at a cost (£800m in revenue from abolishing the digital services tax, for example) and not necessarily for long. There is no shortage of wider geopolitical uncertainty, which may damage growth and accelerate increases in defence spending. And the OBR may well conclude that it has been too optimistic about the UK’s productivity, resulting in downgrades to future economic growth.
The nightmare scenario for Reeves is that she must deliver another fiscal event in the autumn in which she has to put the public finances on a more sustainable footing. It is hard to see that she will be able to impose further spending cuts. This leaves taxes. The left will demand a wealth tax although ministers should be worried that the wealthy are reportedly already leaving the country. To raise serious sums of money, broad-based taxes such as income tax and VAT would have to be used, regardless of Labour’s manifesto pledges. The political pain would be immense.
The Chancellor’s luck may, of course, change. Growth might pick up; the supply-side reforms might bring some benefits; tax receipts might improve. If one takes a pessimistic view of the damage of the Trump administration, however, that seems unlikely.
Today was a difficult day for the government. But there is a reasonable chance that an even more difficult day is in store in the autumn.
[See also: Andrew Marr on the Spring Statement: Rachel Reeves cannot disguise the pain to come]
Content from our partners
