SPRING FORECAST HIGHLIGHTS
In mid-March 2024, the then Shadow Chancellor, Rachel Reeves gave the Mais lecture to the good and the great of the City. In it she set out her broad fiscal framework, including goals to:
• Balance the current budget, i.e. match day-to-day government expenditure with revenues; and
•
Have a single fiscal event (i.e. Budget) each year, in the autumn.
The speech was designed to give its audience confidence that a Labour government – then looking close to a certainty – would bring financial stability.
Just over a year later Rachel Reeves is both where she hoped she would be – 11 Downing Street – and where she hoped not to be – trying to avoid a parliamentary set piece less than five months after her Autumn Budget morphing into a Spring Budget. As the Institute for Government pointed out, among others, the objective of one Budget a year does not sit comfortably with two forecasts in the same period from the Office for Budget Responsibility (OBR). Add in the small fiscal headroom that Reeves left herself after her tax-raising Budget last October and discomfort looked a distinct possibility come spring 2025. Despite various media labels of mini-Budget or even emergency Budget in the run up to 26 March, the Chancellor avoided any fresh tax measures. Instead, her focus was on tightening public spending, an action which means the Treasury’s spotlight now turns to 11 June, when the deferred three-year spending review is due to be published. In the interim, underlining the swirl of economic uncertainty surrounding any forecast, 2 April is scheduled as “Liberation Day” in the US, when Donald Trump reveals his “reciprocal” tariffs.
ECONOMIC UPDATE It all looked better in October…
By the time Rachel Reeves presented her premiere Budget on 30 October there was already a sense of economic gloom. Her late July revelation of a £22 billion ‘black hole’ in the public finances had cast a pall across the following three months as speculation mounted over how it would be filled. The Autumn 2024 Budget arrived with UK growth having already slowed to just 0.2% in the three months to August, after the first quarter of the year had recorded a 0.7% rate. Nevertheless, the OBR projected that in 2025 the economy would grow by 2.0% and only slow marginally to a 1.8% expansion in 2026. The Chancellor’s Budget measures were projected to raise over £40 billion a year in additional tax by 2029/30, with over half coming from the increases to employers’ national insurance contributions. Reeves used the extra tax revenue, the OBR’s assumed growth recovery and the borrowing relaxation provided by her new fiscal rules to increase spending by over £70 billion a year. In doing so, she left herself only £9.9 billion of headroom against her main 2029/30 target of a balanced current budget. In its Economic and Fiscal Outlook (EFO) at the time, the OBR observed this was “…around one-third of the average headroom Chancellors have set aside against their fiscal targets” since 2010. Since October, a combination of slower than projected growth and higher than projected interest rates have vindicated the OBR’s subtle warning. The February government borrowing figures, released the week before the Statement, showed that with a month to go before the end of the financial year the deficit was already £4.7 billion above the OBR’s October projection for the whole of 2024/25. Interest paid on government debt to date has exceeded £80 billion.
This summary has been prepared very rapidly and is for general information only. You are recommended to seek competent professional advice before taking any action on the basis of the contents of this publication.
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