The Chancellor of the Exchequer, Rachel Reeves, delivered the Spring Statement on Wednesday 26 March. With the full Budget now moved to the Autumn, the Spring Statement was a chance for the Labour Government to respond to the latest economic forecasts from the Office of Budget Responsibility (OBR) and to set out its wider economic strategy.
But, as widely predicted, there were also announcements of spending cuts across both the benefits system and the public sector as a whole.
We’ve summarised the key points and the impact they may have for you and your business.
Overview of the Spring Statement 2025
Background to the Spring Statement
The Spring Statement was intended to be a routine response to updated analysis by the OBR. But because of the deteriorating outlook for international trade, and additional pressure on security and defence, this was flagged as being a more significant event.
Had nothing changed in the tax and spend plans from last year’s Autumn Budget, the previously forecast headroom of £9.9 billion forecast at the end of 2029/30 would have become a deficit of £4.1 billion. This is now restored to (exactly!) £9.9 billion.
Growth is actually up slightly against the previous forecasts (apart from a dip in 2025). But this growth is driven by public sector investment, rather than investment from the private sector. The announcement in last year’s Budget of an increase in employer’s National Insurance has dented private-sector confidence.
Don’t forget that this NI increase takes effect from April this year.
Fiscal Rules
There are two elements to the fiscal rules that Labour has put in place.
Debt reduction target: Borrowings (public sector net debt, excluding the Bank of England) as a percentage of the UK’s economy (GDP) to be lower by the fifth year of the forecast period.
Stability rule: The Government’s current spending should be covered by its income, primarily taxes.
The OBR calculates that there’s a 51% chance of the debt reduction target – i.e. the £9.9bn headroom – being met.
Economic Growth Forecast Adjustments
The OBR’s forecast for growth has been cut from 2% to 1% for 2025. However, forecasts for the following years are higher than previously forecast, meaning that, overall, the economy is projected to be larger by 2029 than in last year’s autumn forecasts.
Real household disposable income is expected to grow nearly twice as fast this year, making households, on average, £500 per annum better off.
Fiscal Headroom and Budget Balance
Fiscal headroom has been restored to £9.9 billion by 2029–30, compared with the ‘no change’ forecast of a £4.1 billion deficit.
The Institute for Fiscal Studies warns that there is a significant chance of likely future tax rises if the Government is going to meet its targets.
Welfare Reforms and Impacts
Cuts to some welfare benefits were announced before the Spring Statement, and these figures were tweaked slightly in the statement.
The main welfare changes are:
- Incapacity benefit to be halved to £97 per week for new claimants, and frozen, saving £4.8 billion by 2029–30.
- Universal Credit standard allowance to rise from £92 to £106 per week. The health element is to be cut by 50% and frozen for new claimants.
Defence and Security Spending
With an eye on escalating instability on the world stage, an additional £2.2 billion has been allocated to the Ministry of Defence for 2025–26.
Defence spending is to reach 2.36% of GDP next year; on course for 2.5% by 2027.
At least 10% of the equipment budget is to be spent on advanced tech (e.g. drones, AI).
Investment is expected on advanced manufacturing capacity, including a £400 million fund for innovation.
Taxation and HMRC Measures
As widely predicted, no new tax increases were announced.
HMRC will take on an additional 600 staff to tackle tax evasion, targeting £1 billion of additional tax revenue collections by 2029.
Public Spending and Efficiency Drives
Departmental spending growth is down, overall, from 1.3% to 1.2% above inflation, annually.The Government is instigating a Civil Service efficiency drive aimed at a 15% cut in administrative costs by 2030. This will mean cuts to staff and more use of technology, such as AI and software automation.
Overall, it seems like the Government’s focus was on retaining the previous £9.9 billion headroom. But that target is so tight that there’s expected to be continuing uncertainty between now and the Autumn Budget around the possibility of future tax rises. The direction of travel may be a bit clearer when the departmental spending reviews are published in June.
Helping you plan for the economic challenges ahead
If you believe your business will be affected by the tough economic conditions the UK is facing over the coming year, we’re here to help you plan, cut costs and get your cashflow on track.
Drop us a line to book a meeting and chat with the Cheshire team.
