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Aside from the specific announcements, we think there are five areas worth looking out for tomorrow – the five things that will shape political and economic developments ahead of the autumn:
- How much of the spending reductions for Departments fall within the Spending Review period – as opposed to the target year of 2029-30 – and what this means for unprotected Departments. Efficiency savings to the civil service won’t be enough to achieve the savings required; painful cuts will be necessary. Expect significant pushback from Cabinet Ministers.
- How much of the Chancellor’s new headroom might already be ‘gone’ by this time next week. Movements in gilts since the OBR’s observation window for this event closed, a possible £1 billion concession to the US on abolishing the Digital Services Tax, and how markets react to ‘liberation day’ could all eat into the headroom that Reeves will announce tomorrow.
- The impact of welfare savings, with the Government and the OBR likely to put numbers on who is impacted by the changes to Personal Independent Payment and Universal Credit. Expect the pushback from Labour MPs to intensify, even if the OBR might look favourably at some aspects of the welfare reform package supporting people into work.
- What the OBR says about productivity and growth and whether there are any clues as to the possibility of a larger downgrade in the autumn – a scenario the Treasury increasingly fears.
- The growing pressure on how the Chancellor has chosen to define her fiscal rules – specifically, the definition of current budget balance. There will be more calls – from allies and non-allies alike – for tweaks, such as moving to a rolling target or allowing more flexibility. A head of steam could start developing under the idea of headroom range.
What proportion of spending cuts will fall outside the Spending Review period
The Chancellor’s plans tomorrow are likely to involve further departmental spending constraints. This comes on top of plans in the Budget, which, according to the OBR, already implied 1.1% of annual real-terms reductions to unprotected Departments in the Spending Review years (2026-27, 2027-28, 2028-29). The target year of 2029-30 will not be covered by this Spending Review.
The question for tomorrow is how much of the required consolidation falls within the Spending Review period, instead of merely revising down the planned growth in day-to-day spending for 2029-30? Revising down the spending assumption in that year from 1.4% to 1% would save c.£10 billion, which is probably in line with what the Chancellor needs.
But it would lack credibility. Past Chancellors have been guilty of pencilling in tight spending plans for the back end of the forecast, only to have to top them up later – not least when going into a general election.
So, while some downward adjustment in the 2029-30 number can help, it cannot do all the heavy lifting. This is where cuts in the Spending Review period come in, with some reports indicating that unprotected Departments could face reductions in real terms of around 7% over three years – roughly in line with the mid-point of the two scenarios requested from Departments by the Treasury.
Reeves has indicated that her plans will involve a 15% reduction to departmental running costs over five years to save £2 billion annually by 2029-30. This is a sensible area to focus on. There is undeniably scope for savings, as illustrated by the fact that civil service headcount grew by 30% from 2016 to 2024, driven by the pandemic and Brexit, and particularly if Labour succeeds in smoothing trade frictions, which might clear the way for reductions in Departments like DEFRA. But the challenge will be the extent to which these savings are cashable for the Treasury in the face of trade union pressure and the Chancellor’s commitment to reinvest savings into the frontline.
Achieving the likely scale of cuts needed in the SR period will, therefore, require some hard decisions on stopping actual programmes, not just relying on efficiencies. This is where the political challenge will grow ahead of the Spending Review in June, with pushback from Cabinet Ministers in prominent ‘unprotected’ Departments like the Home Office and others, particularly given the Chancellor’s claim at the Labour conference that there would be no return to austerity.
How much of the new headroom might already be ‘gone’
The £9.9 billion left by the Chancellor against the current budget balance is historically low, even if it is above the £8.9 billion left by Jeremy Hunt against previous fiscal rules in March 2024.
The £9.9 billion headroom is lower than the typical average forecast error and, in the Budget, the OBR assessed the probability of the current budget balance target being met at 54%.
Market movements in gilt yields in the days following the October event were already enough to eat into the £9.9 billion. This time around, watch what the OBR says about the impact of downside factors, such as the imposition of additional US tariffs next week, on the global economy. Balanced against this will be whether investors see the UK as a relative safe haven, particularly if the Government succeeds in negotiating some form of tariff exemption for UK goods ahead of April 2.
All in all, there are good reasons to expect that, come this time next week, a decent chunk of the headroom might be gone. This is based on movement in gilts since the window for the OBR closed on February 12 and what might happen to the global and domestic economy in the aftermath of ‘liberation day’. Additionally, the UK may have to concede to abolishing its Digital Services Tax in talks with the US, which could cost almost £1 billion a year by 2029-30. Of course, this headroom will move between now and autumn, but it will speak to how close the margins are and how likely, in our view, tax increases and fiscal rule changes are in the near future.
Who is impacted by the Government’s welfare savings
The publication of the impact assessment on the Government’s £5 billion welfare savings package (and the OBR’s view) will be one of the most significant political developments of the day and will provide further oxygen to MPs concerned about the impact of the changes.
What the Government says about how the benefit changes affect household income deciles, relative poverty, and the number of fewer claimants for both the changes to the Personal Independent Payment and the cuts to the Universal Credit health element will be studied closely and lead to pressure on the Government from within the Labour party. This will also matter in the context of the Government’s stated ambition to increase real household disposable income across the Parliament.
On the other hand, what the OBR judges about the impact of, for example, scrapping the health top-up for under-22s and introducing the ‘right to try’ guarantee on labour market participation, will help establish the extent to which the Government can claim that its reform package will incentivise more people into work.
Do the OBR start to roll the pitch for adjusting its stance on productivity in the autumn
The key language to look for in the Economic and Fiscal Outlook (EFO) on the economic side, though, will be on productivity. As we’ve consistently said since the start of the year, the OBR is unlikely to make forecast-wide downward revisions at this stage. It has only done so once before, and that was in the autumn of 2017, following on from a summer of forecast appraisal, downgrading its assumption for medium-term productivity growth by 0.6% a year. As the OBR said, this downgrade would depress growth in GDP and in the major tax bases, raising borrowing by £25.8 billion.
But, overall, the OBR has long been an outlier in forecasting a bullish outlook for productivity growth, largely based on a look at long-term historical trends and an assumption that much of the post-crisis slowdown in productivity was cyclical – i.e., it would recover. The question has always been whether there would come a point where data outturns in the economy would persuade the OBR to twist rather than stick. This has long been the fear in the Treasury, and they increasingly think it will happen this time.
We will be scanning the language in the EFO for clues as to what the OBR might be considering ahead of the autumn, particularly on the outlook for business investment and total factor productivity.
Also, watch for commentary on Government policy, where Ministers and advisers will have been working hard behind the scenes to shift cautious OBR assumptions on the supply-side benefits of various reforms. For example, the Government will argue that increased defence spending will have positive spillover effects in areas like R&D. It will also make the point, justifiably, that the Planning and Infrastructure Bill sets out ambitious reforms to speed up development that previous Governments shied away from. But the key here will be trying to persuade the OBR of the additional activity that can take place and over what timeframe.
Plus, stepping back, what the OBR gives, it can also take away. In the October Budget, as well as pointing out that it had not been able to factor in the possible upside from planning reform, the OBR said the same about the downside impact of the employment rights package.
A final point of interest here is whether the OBR makes some comment on data issues, particularly longstanding concerns on the quality of ONS labour market stats. These issues might be another reason why the OBR carefully takes its time over the summer before considering big moves for the autumn.
Does this start to trigger serious discussion around amending the fiscal rules
Lastly, we think the story moving on from the Spring Statement will start to focus on Rachel Reeves’s precise choice of fiscal rules and whether these can survive unamended.
Much of the run-up to the autumn will be dominated by the probability of more tax rises, given various pressures on public expenditure. However, the immediate picture will be the challenge of landing welfare reform with Labour MPs, coupled with Cabinet Ministers in unprotected Departments coming to terms with tight settlements that feel like a return to austerity.
It’s unlikely that Number 10 will let the Chancellor reach for the spending restraint lever again. One option is for Ministers to use the summer to pitch a big tax rise, referring to uncertain global conditions as justification.
But, more likely, we think questions will be raised on whether the borrowing rule as currently defined is politically sustainable. The Labour manifesto committed to only fund day-to-day funding from tax receipts, a credible aim. But the Chancellor chose to then define this as achieving the current budget balance in a fixed year (2029-30) and without any adjustment for the economic cycle. She built in flexibility, namely the ability to temporarily run a deficit of up to 0.5% of GDP if needed. However, the small print stipulated that this can only be used once 2029-30 is the third year of the forecast, meaning she cannot use any wiggle room now.
Given the implications for some Government Departments that flow from this, the pledge of no return to austerity, and the fact that the end of the forecast period overlaps with an election year, we think the pressure for change grows. The Treasury will explore whether, e.g., moving out the target year, moving to a range, or a rolling target, can be sold to the market as tweaks and still within the spirit, if not the strict letter, of the current budget balance.
Conclusion
The plan for tomorrow’s Spring Statement is now largely baked in. If there’s a rabbit, perhaps there could be some measures to help the hospitality industry in the short term through, for example, business rates relief to offset the bad news on growth. But the Chancellor will present a plan that centres on additional spending restraint. Her challenge now will be how politically deliverable this plan is ahead of choices she might need to confront in the autumn on potentially a much larger scale if the OBR makes more significant downgrades. Talk will build of additional tax rises, but – we think – just as interesting will be whether events force the fiscal rules back into focus.
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