Rachel Reeves's spring statement 2025: The IfG's verdict

Higher debt costs wiped out Reeves’s narrow buffer against her fiscal rules  

Higher interest rates and inflation have driven up the expected cost of government debt in the Office for Budget Responsibility’s (OBR’s) new forecast. The good news for Reeves was that the OBR thinks recent economic weakness will be purely temporary. 

The chancellor and OBR both, rightly, pointed to a global picture of rising interest rates on government debt. Gilt rates, the interest rates the UK government pays on its debt, have increased since the OBR's last forecast in October 2024 and are expected to remain higher in future years. The Bank of England’s interest rate is also expected to remain higher for longer. These revisions increase the cost to the government of its borrowing and were enough by themselves to wipe out the fiscal headroom the chancellor established at the budget last year. 

The OBR’s projected growth rate for the economy in 2025 has been halved from 2% to 1%. This was expected. But the OBR has judged this is purely a temporary problem and so has increased its forecast for GDP growth in future years, projecting that the economy will be marginally bigger in 2029 than it did previously. 

Underpinning these growth forecasts is the OBR decision to keep its medium-term forecast for productivity growth largely unchanged. But productivity growth has repeatedly underperformed this in recent years. If the OBR were to move to a more pessimistic outlook for productivity, that would reduce growth forecasts and could easily put the government back at risk of breaking its fiscal rules.

As the OBR points out in its report, even quite modest changes to the forecast would wipe out the chancellor’s headroom against her fiscal rules. Interest rate expectations are volatile and gilt rates have already increased somewhat since the OBR collected data for its forecast in February. Modest further rises could be enough to throw Reeves off track again, as could new trade tariffs or other global disruptions.

Average incomes will grow slightly more quickly than previously expected, despite welfare cuts

The government’s Plan for Change pledged that household living standards – as measured by real household disposable income – would rise across the country. ⁴ https://labour.org.uk/plan-for-change/  The new policy measures announced by Reeves in her spring statement, notably the cuts to disability benefit, will lower real household disposable incomes per person by around 0.25% by 2029/30, according to the new forecast from the Office for Budget Responsibility (OBR). But this is slightly more than offset by two other factors. 

First, there is a moderately stronger forecast for real wage growth compared to the last OBR forecast in October. Second, the OBR now thinks that looser planning laws will increase the housing stock and so increase the value that homeowners derive from the services provided by their home: this is counted in the official statistics as a stream of income known as ‘imputed rent’. But, since households never see this cash, this may not be quite what voters had in mind when the government promised to raise their living standards.

Household income growth is expected to be especially weak in 2026/27 and 2027/28 as businesses pass on the cost of last autumn’s employer’s National Insurance rise to workers in lower wage growth, income tax thresholds remain frozen (drawing more of people’s income into higher tax brackets) and new welfare cuts take effect.

Reeves took action to offset forecast changes: this is not the right way to make fiscal policy 

As widely trailed, Reeves responded to a fiscal forecast downgrade by turning her spring forecast ‘update’ into a minor fiscal event. If she had not announced any policy changes, she would have been on course to miss her main fiscal rule (that current spending should be covered by tax revenues in 2029/30) by less than £1bn. The policy changes announced restored a current budget surplus of £9.9bn in 2029/30 – exactly the same headroom against the main fiscal rule as at the October budget.

Almost half of this fiscal consolidation came from changes to disability benefits. The OBR estimates that those changes, announced last week, would save £4.8bn per year by the end of the forecast – although it emphasised that the effect of these changes is uncertain, and that it has not had time to conduct a full assessment. The other savings come from slightly lower day-to-day spending at the end of the forecast and a small increase in tax revenues from a bigger investment in HMRC capacity.

The changes announced today were relatively modest, so Reeves might be able to maintain that she has not abandoned her commitment to hold one major fiscal event per year. And it is welcome that she has not made any changes to tax, and that she protected capital spending from any cuts. But the statement nonetheless exposes persistent failings in UK fiscal policy making. The OBR forecast revision was fairly minimal – around 0.5% of GDP in the fifth year, in line with the average forecast change since 2010. Yet in response even to this small change, in a highly uncertain forecast, the government has rushed through complex changes to welfare policy, which were provided to the OBR too late to be fully incorporated in the forecast and which could be revised in future. 

Reeves has retained exactly the same headroom against her main fiscal rule, which remains a historically low level of headroom, so another normal-sized forecast error could require another re-assessment in the autumn. Tinkering with policies in response to small forecast changes was a regular problem under the previous Conservative government. Unfortunately, this is a vice that Labour seems to have inherited. 

The government has managed to avoid cutting unprotected departments’ budgets even further

There were concerns in advance of the spring statement that a worsening economic forecast would require Reeves to pencil in larger-than-expected cuts for ‘unprotected’ spending departments at the upcoming spending review. Instead, the government has more or less maintained the implied cut for departments such as the Ministry of Justice, the Ministry for Housing Communities, and Local Government and the Home Office at around 1% per year in real terms.

That has come despite a slight drop in day-to-day spending in 2028/29 and 2029/30 (£1.7 billion and £3.7bn in 2024/25 prices respectively).

This is more than offset by changes to how the government intends to increase defence spending over the next few years. As previously announced, it intends to fund higher defence spending by cutting the foreign aid budget. The reduction in day-to-day spending on foreign aid is worth £2.8bn in 2028/29 – but not all those savings are going into day-to-day defence spending. Instead, the government has chosen to direct most of the higher defence budget towards capital spending, leaving marginally more funding for unprotected departments, albeit with cuts still likely.

How those cuts are allocated across departments will be decided at the spending review in June. If the government is going to improve services across the board, it will need to improve how services operate.

We heard tentative good news on this front on Wednesday as the chancellor announced a ‘Transformation Fund’ worth £3.25bn over three years to support public sector reform. Initial allocations include £25m for the fostering system and £42m for testing and deploying AI applications in government. £150m is also set aside for civil service employee exit schemes, as part of the drive to reduce administrative costs by 15% by 2030. 

The Transformation Fund is a welcome recognition that upfront investment is often needed to make efficiency improvements that actually lead to long-term savings. But when spread across the entire public sector, £3.25bn on its own will not go far. This fund should help drive value for money savings, but when spending review settlements are announced in June it should be only a small part of the government's plans for reform.