Spring Statement 2025: initial IFS response

Paul Johnson, Director of the IFS, said: 

"This was just about the smallest fiscal event Rachel Reeves could have managed in the context of her fiscal rules and the minor forecast downgrade presented to her by the OBR. The fact that a fairly run-of-the-mill change to the forecast forced her to cut her spending plans reflects the tiny amount of headroom she chose to leave against her targets last October. In today’s Spring Statement, departmental spending plans and, it seems, welfare policy have been fine-tuned to return to precisely the same amount of headroom that she had previously.  

This approach creates two problems.  

First, if you are going to have “iron-clad” fiscal rules then leaving yourself next to no headroom against them leaves you at the mercy of events. Ms Reeves has left herself with the same £9.9 billion sliver of headroom against her target to balance the current budget as she had in October, and a very similar amount of headroom against the target that debt should be falling in 2029–30 (£15.1 billion, down from £15.7 billion in October). All of that adds to uncertainty around policy. We can surely now expect 6 or 7 months of speculation about what taxes might or might not be increased in the autumn. There is a cost, both economic and political, to that uncertainty. The government will suffer the political cost. We will suffer the economic cost.  

Second, the Chancellor really does seem to risk losing the wood for the trees. If it was right to announce halving the health-related element of universal credit last week, is it now really appropriate not only to halve it, but also then to freeze it for the rest of the parliament? Knocking a pound a week off the main rate of universal credit in order, it seems, to return the fiscal headroom to exactly where it was last October, really does risk undermining the idea that benefit reform, which is much needed, is being made for any reason other than chasing a fiscal number. One could say similar things about small adjustments to spending numbers and finding a billion of tax revenue down the back of the sofa from increased compliance and debt collection: policy is seemingly being fine-tuned in pursuit of an arbitrary and highly uncertain measure of ‘fiscal headroom’.  

There were some bright spots in today’s Spring Statement: planning reforms are judged by the OBR to boost the economy, and the government deserves credit for protecting investment spending in tough fiscal conditions. But overall, this was a holding exercise ahead of the really significant decisions later in the year. The June Spending Review will be where the Chancellor’s tighter spending plans crystallise into specific choices and start bumping up against reality, and against her cabinet colleagues. And the Autumn Budget? Even small downgrades to the OBR’s forecasts could mean more action is needed to fill a fiscal hole. And given global risks and shoddy UK data, a bigger downgrade is entirely possible. Indeed, the OBR document points to the downside risk around its all-important productivity assumption. We might be in for another blockbuster Autumn Budget. What the Chancellor has all but guaranteed is another six months of damaging speculation and uncertainty over tax policy. That didn’t go well between last July’s election and October’s Budget. I fear a longer rerun this year."
 

Additional analysis

On the public finances and economic outlook:

• It’s striking that, despite the cuts to spending plans announced today by the Chancellor, the government will still be borrowing almost £50 billion more over the next five years than was expected back in the autumn. In the short term, that reflects disappointing economic growth and tax revenue in recent data releases. In later years, it also reflects higher debt interest spending – up by £10 billion in the final year of the forecast, in large part because of higher expected interest rates.
• The Office for Budget Responsibility’s (OBR’s) job is made harder by the turbulence of global events and by doubts over the quality of important UK economic data. The OBR models a scenario in which weaker productivity growth persists, adding almost £60 billion to borrowing in the final year of the forecast. A downgrade of even half that scale in the autumn would prove far more significant than the forecast updates presented today.  

On public services:

• There were two notable features of the Chancellor’s updates to her plans for public service spending. First, the cash injection provided last autumn will, in the face of higher inflation (3.8% in 2024–25 as measured by the GDP deflator, up from 2.4% in the October forecast), provide less of a real-terms boost. As a result of this and other factors, today’s figures suggest that day-to-day spending will be 2.6% higher in real terms in 2024–25 than it was in 2023–24; in the October forecast, it was supposed to be 4.2% higher. Given how much the government was relying on this short-term cash injection to get public services back on their feet, this is significant.
• The second striking feature is the degree to which spending plans are (even more) front-loaded after this year. After growing by 2.6% this year, day-to-day spending will grow by 2.5% in 2025–26, then 1.8% in 2026–27, 1.0% in 2027–28, and 1.0% in 2028–29. These increases are slightly less generous, on average, than planned in October – in part reflecting large planned cuts to administration spending; in part reflecting a shift from day-to-day spending to capital spending. They remain considerably more generous than the plans penciled in by the last government. Growth in capital spending after 2025–26 is more generous than planned last October, partly as a result of this shift – and again the plans remain heavily front-loaded. Real-terms cuts to capital spending are still penciled in for 2028–29 and 2029–30. Tough decisions over how to allocate the overall pot will be made at the June Spending Review.

On working-age benefits:

• Together, the reforms confirmed today make up the biggest cut to benefits in any fiscal event since 2015, and represent a substantial change in the shape of the system. In recent years there has been a steady shift towards the benefit system supporting people with their health conditions. In 2010–11 spending on working-age health-related benefits was £28 billion (22% of working-age benefit spending). That had risen to £37 billion (32%) by 2019–20 and £49 billion (37%) by 2023–24 (all figures in today’s prices).  

• The new reforms go in the opposite direction to this trend – although even with them, health-related benefit spending is set to rise in absolute terms and as a share of the overall working-age benefits bill. The reforms increase spending on basic (non-health-related) support in universal credit by £1.9 billion a year, benefiting around 6.8 million families by £280 per year each on average. In contrast, a tightening of eligibility criteria for personal independence payment, the key working-age disability benefit, is expected to save £3.9 billion a year from 800,000 people (a £4,500 a year average loss). The government also announced reductions to the health element of universal credit, saving £3.0 billion a year from 3 million individuals (a £1,100 average loss) and cancelled the previous government’s reforms to eligibility for future claimants at a cost of £1.6 billion a year. Many will be affected by multiple reforms, mitigating or amplifying effects (all numbers relate to 2029–30). 

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