Spring Forecast shaping up to be more consequential than first billed

On 26 March, Rachel Reeves will respond to updated economic and fiscal forecasts from the Office for Budget Responsibility (OBR). One key question is whether those forecasts put the Chancellor on track to miss her fiscal rules. This is by no means guaranteed. There are a huge number of moving parts, recent economic data paint a mixed picture, and much will depend on the OBR’s judgements about future economic developments. The Chancellor may yet get lucky. But she may not. 

A relatively minor downgrade in the OBR’s forecast could force the Chancellor to choose between policy stability and her commitment to a single fiscal event per year, on the one hand, and her fiscal rules on the other. This prospect is largely a result of the Chancellor’s own earlier decisions – and in particular her decision to leave only the finest of margins against her fiscal rules. 

The case for acting now to meet the fiscal rules is not unambiguous. The constant fine-tuning and tweaking of policy brings costs. There is no meaningful economic difference between a forecast for a small current budget surplus in 2029–30 and a forecast for a small current budget deficit in 2029–30. The announcement of any policy changes could be delayed to the full fiscal event in the autumn. But the Chancellor might worry about the message it would send to financial markets if she were to breach her ‘non-negotiable’ fiscal rules at the first time of asking, and may wish to act before June’s multi-year Spending Review sets out departmental budgets for the rest of this parliament. Moreover, if she does nothing now, promising action in the autumn, that would almost certainly lead to months of damaging speculation over what taxes will be increased in the Budget.

If she does opt for fiscal action, it could take the form of tax rises, spending cuts, or both. Given the forward-looking nature of the fiscal rules, promises to raise taxes or cut spending some years into the future would be enough to meet the letter, if not the spirit, of those rules.

• Extending the freezes to various personal tax thresholds by an additional two years (2028–29 and 2029–30) could raise around £10 billion in 2029–30. A further threshold freeze would be a stealthy and arbitrary means of raising revenue, but it is – not unrelatedly – a tax rise that recent governments have proved willing and able to implement, and so may be judged as credible. Other tax rises are of course possible.
• The Chancellor could reduce the generosity of plans for public service spending – reducing the size of the pot, before it is allocated to individual departments in June. Reducing the planned cash level of day-to-day spending in 2029–30 by around £10 billion would, under the October 2024 inflation forecast, reduce the average real-terms growth rate to around 0.9% per year (down from 1.3%). She may not even have to change the cash numbers she has pencilled in: she could allow higher inflation to erode the real-terms generosity of the plans she published in the autumn. That would make what already looks like a difficult Spending Review even more challenging. Reducing planned increases in public service spending even further would almost certainly mean a return to cuts for some major spending programmes.
• The government could seek savings from non-public service budgets, most notably from within the social security budget. A package of reforms to health-related benefits, whose costs are currently projected to rise steeply, would – if the costings are signed off by the OBR – help with the fiscal arithmetic, but would pose other challenges. 

IFS researchers will present their analysis of the outlook for the Spring Forecast at 1pm on Thursday 6 March, and will be joined by Simon French, Chief Economist and Head of Research at Panmure Liberum, for his thoughts on the UK macroeconomy.

Matthew Oulton, Research Economist at IFS, said:

‘Rachel Reeves has engineered a trap for herself, albeit in difficult circumstances. Aiming to meet inflexible, pass–fail fiscal targets by the slimmest of margins was a risky strategy from the outset. It was always possible that economic conditions would deteriorate, put her on track to miss those rules, and push her into making tax and spending changes at what isn’t supposed to be a fiscal event later this month. This scenario is far from guaranteed and she could still get lucky. But if not, she will have to choose between her fiscal rules and her commitment to holding only one fiscal event per year.’ 

Bee Boileau, Research Economist at IFS, said:

‘The Chancellor has said that her fiscal rules are non-negotiable. It would therefore be difficult to present the world and the markets with figures that show them being broken, and doing so would also lead to months of speculation about what taxes would be raised in the Autumn Budget. If she prioritises the fiscal rules and breaks her commitment to a single annual fiscal event then she faces a stark choice between her promise not to come back with a further round of tax rises and her promise of no return to austerity. The Spring Forecast could turn out to be far more consequential than the non-event it was first billed as.’