A defensive Spring Statement to set the fiscal record straight for a changing world

• Defence spending – the Government will spend 2.5 per cent of GDP on defence by 2027; and
• Welfare changes – additional changes to the recent reforms, with Universal Credit health element to be halved.

At times running the risk of sounding like a playground game (Promised, Delivered, Opposed), the Chancellor made it clear from the outset that this Spring Statement was intended to build on the ambitions of her Autumn Budget to restore stability in public finances, to deliver prosperity for working people and fix the foundations to deliver change.

Part of these intentions includes securing Britain’s future in a world “changing before our eyes.” Referring extensively to the uncertain global economy and the impact of this on trading patterns and borrowing costs, the Chancellor justified the lack of promised economical growth and higher inflation with a series of statistics and forecasts.

Defence spending

Defence spending will see the Government spend 2.5 per cent of GDP on defence by 2027, which will be achieved by reducing overseas aid by 0.3 per cent of gross national income – pegged as the biggest boost to defence spending since the end of the Cold War.

The Chancellor has confirmed a £2.2 billion capacity for export funding, a funding boost for the Ministry of Defence from next year designed to augment defence exports.

Working with the Defence Secretary, she intends to form a new Defence Growth Board designed to put defence at the heart of modern industrial strategy and make Britain an industrial superpower.

Building on her assurances to protect working people and continuing the promise of economic growth, Ms Reeves suggested the defence agenda would present new opportunities and new contracts in world-class defence industrial centres from Belfast to Deeside, and from Plymouth to Rosyth.

The state of welfare

Last week, the Secretary of State for Work and Pensions set out his plans to reform the welfare system. Today, Ms Reeves announced additional changes including a reduction in the rise in the standard allowance for Universal Credit and a 50 per cent reduction on the health element for new claimants in 2026/27, following which the rate will be frozen. Personal Independence Payments (PIP) will also be reduced via tightened eligibility criteria.

Honourably, these cuts are aimed to properly support those who can work to do so, or risk writing off an entire generation. With 1 in 8 young people not in employment, education or training, the Chancellor is keen to provide guaranteed, personalised employment support to help people back into work and has promised £400 million to support the Department for Work and Pensions and Job Centres to deliver these changes in a fair and effective manner.

It is felt that these cuts will affect 3.2 million families by 2030 and originally Ms Reeves indicated these changes would save £5bn; however, it seems these savings had less of a ceiling than Ms Reeves’ ambitions and the OBR confirmed subsequently that the savings would be closer to £3.4bn. Today, presumably as a result of the additional cuts, Ms Reeves announced the savings would equal a total of £4.8bn.

“The Labour Party is the party of work…But if you can’t work, you should be properly supported.” It remains to be seen if these cuts will not only add up, but more importantly whether they will provide the support (as suggested) or strangle further those in poverty choosing between eating, heating or renting.

Vital statistics

Ahead of this Statement, the Chancellor knew she would need to explain the Office for Budget Responsibility’s (OBR) halved growth forecast for 2025, down from 2 per cent in the autumn to 1 per cent; however this blow was softened by the OBR endorsing year on year growth until 2029/30.

Much of the remainder of the Statement focused on fiscal headroom. Referencing her two fiscal rules (Stability and Investment) set out in the Autumn Budget, Ms Reeves attempted to explain how a £9.9bn surplus in the Autumn would become a £4.1bn deficit in 2029/30 due, in no small part, to the rise in the cost of borrowing during this period of heightened uncertainty in global markets.

With a plethora of numbers but little detail, the Chancellor explained the route back to positive fiscal headroom, assuring a £6bn surplus by 2027/28.

Many who hoped there might be adjustments [read, retractions] to the tax hikes in the Autumn Budget will be sorely disappointed, but Rachel Reeves did keep her promise of no further tax increases. For now.

While we are yet to see draft legislation providing the finer detail associated with the 31 October tax changes, the Chancellor has made it clear that the fiscal rules introduced to control government borrowing are non-negotiable.

In spite of the Chancellor repeatedly referencing the Government’s dogged support of working people, the Shadow Chancellor Mel Stride was quick to counter the traditional economist’s view: If you tax something, you get less of it. Many believe Rachel Reeves has just laid the groundwork for an unforgiveable tax raid in the autumn. Cue: months of worry and speculation for businesses.

With the UK tax share to hit a post-war high, the Chancellor has promised that day-to-day spending will be met by tax receipts. So at least there’s that.

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