Rachel Reeves has delivered her eagerly awaited spring statement, offering an update on the state of the British economy. While not a formal budget—following Labour’s pledge to deliver only one budget per year—the statement provides insight into the government’s economic progress since the fiscal update last October.
In her speech to MPs, Ms Reeves noted that “the world has changed” since her first budget in October 2024, which she attributed as a reason for the string of cuts and downgrades announced today. However, critics argue that today’s update is a direct consequence of the government’s economic decisions since Ms Reeves assumed office in July 2024.
Here are the key points from the spring statement:
UK growth forecast slashed
The Office for Budget Responsibility (OBR) has downgraded the UK’s growth forecast for 2025 from 2% to just 1%. Ms Reeves expressed dissatisfaction with these numbers, noting that they fall short of expectations. However, she also presented a plan to move from a budget deficit of £36.1 billion in 2025-26 and £13.4 billion in 2026-27 to a surplus of £6 billion by 2027-28. This surplus is projected to rise to £7.1 billion in 2028-29 and £9.9 billion by 2029-30.
Despite the gloomy short-term outlook, the chancellor highlighted that the OBR anticipates the economy will be “larger” by the end of the forecast period than when her first budget was presented. The OBR forecasts growth of 1% in 2025, 1.9% in 2026, 1.8% in 2027, 1.7% in 2028, and 1.8% in 2029.
Improving household income
On the matter of living standards, Ms Reeves revealed that real household disposable income per person is expected to grow by an average of 0.5 percentage points annually from 2025-26 to 2029-30. This improvement will be driven by stronger wage growth and falling inflation in the later years of the forecast. The chancellor noted that “disposable income will grow this year at almost twice the rate expected in the autumn,” adding that “households will be on average over £500 a year better off under this government.”
Welfare cuts to meet fiscal rules
In line with her fiscal rules, Ms Reeves outlined further cuts to welfare spending. The OBR’s review of welfare measures, including those announced earlier in March, revealed that these would save £4.8 billion. Among the latest changes, the universal credit health element will be cut by 50% and frozen for new claimants. However, the universal credit standard allowance will rise from £92 per week in 2025-26 to £106 per week by 2029-30.
Defence industry investment
Ms Reeves reiterated the government’s commitment to boosting the UK’s defence industry, stating that the UK aims to become a “defence industrial superpower.” She confirmed that the government will meet its pledge to spend 2.5% of GDP on defence by 2027. The Ministry of Defence is set to receive an additional £2.2 billion next year, earmarked for high-tech weaponry, the upgrade of HM Naval Base in Portsmouth, and the refurbishment of military family homes. This funding is fully accounted for, sourced from Treasury reserves and cuts to foreign aid.
No new tax increases but crackdown on tax evasion
The chancellor confirmed that no new tax increases would be introduced in this statement. However, she highlighted the government’s commitment to tackling tax evasion, announcing that the number of tax fraudsters charged annually will rise by 20%. This crackdown is expected to raise an additional £1 billion for the economy.
Spending cuts and departmental budgets
On government spending, Ms Reeves announced a £6.1 billion reduction in day-to-day expenditure by 2029-30, compared to previous projections. However, government spending will still grow by an average of 1.2% per year above inflation, slightly less than the 1.3% growth forecasted last autumn. To support public sector reforms, she revealed the creation of a new £3.25 billion Transformation Fund.
Housing and planning reform
Turning to housing, Ms Reeves noted that the government’s reforms would permanently increase real GDP growth by 0.2% in 2029-30. She also claimed that the reforms would lead to housebuilding reaching a 40-year high. Changes to national planning policy are expected to bring the government “within touching distance” of its manifesto promise to build 1.5 million new homes. To meet this ambitious target, Ms Reeves emphasised the need for workers with the “right skills.”
Market reaction
Financial markets’ reactions to fiscal events can influence government borrowing costs. Following Ms Reeves’ statement, UK bond yields dipped slightly, with the yield on 30-year UK government bonds, known as gilts, easing by almost 0.1 percentage points to 5.283%. Similar, but smaller, declines were observed for 10-year and 2-year bonds. However, the value of the pound fell by three-tenths of a cent against both the dollar and the euro.
Rachel Reeves’ spring statement provides a sobering update on the state of the UK economy, with growth forecasts revised down and further austerity measures in place to meet fiscal targets. While some progress has been made, particularly in the areas of defence and housing, critics remain concerned about the long-term impact of these economic decisions on living standards and public services.
