The Spring Statement of 2025: Balancing the Books in the Face of Competing Demands on the British Economy
Chancellor of the Exchequer Rachel Reeves delivered, “by Command of His Majesty”, her much-awaited Spring Statement to the House of Commons on 26 March 2025. Her presentation was preceded by revised forecasts for the economy and public finances by the Office for Budget Responsibility (OBR), which downgraded its growth projection for 2025 from 2% to 1% while upgrading its predictions for the following four years up to 2029. Much of what the Chancellor had to say had been either leaked or correctly predicted before her presentation, and there were relatively few surprises.
The government’s stated priorities are to drive economic growth, restore economic stability, raise living standards, reform the state to “ensure public services are productive and agile”, build an NHS “fit for the future,” collect all due taxes, and keep the country safe, all in the face of challenges to the collective security of Europe and a sharp increase in global economic uncertainty. Welfare spending should be targeted to those who most need it, as a pro-work welfare system coaxes those people back to the workplace, thereby cutting welfare spending as a share of GDP.
Growth will be supported by investing £13 billion in capital infrastructure over five years, while a £625 million construction skills package will train up to 60,000 more skilled workers. The National Planning and Policy Framework will facilitate up to 170,000 additional homes over the forecast period. Defence spending will be brought up to 2.5% of GDP by April 2027, with an ambition to reach 3% in the next Parliament, but at the expense of a reduction in the Overseas Development Assistance (ODA) budget. A £3.25 billion Transformation Fund will drive efficiencies in public services, aided by digital technology and artificial intelligence (AI).
Reeves is working under the constraints of her fiscal rules, which require the government’s current budget (day-to-day budget) to be in surplus, and public sector net financial liabilities to be falling, while the welfare cap sets limits on certain social security benefits and tax credits. With a national debt of £2.8 trillion and an estimated debt interest payment of £105 billion this financial year, the Chancellor’s “financial prudence” demands that any government borrowing to support any increased spending is reined in. To directly quote from the Statement: “The government has restored in full headroom to the stability rule”, even though that fiscal headroom of £9.9 billion, to avoid breaching spending rules, appears somewhat fragile. It also doesn’t help that the Bank of England is offloading government bonds (gilts) in a process of quantitative tightening, thereby further increasing borrowing costs.
Positive measures include planning reforms to enable major economic infrastructure projects, investment in the construction industry to build affordable housing, increasing defence expenditure at a time when diplomatic negotiations have taken a backseat and national security is under threat, and investment in HMRC to close the tax gap” and clamp down on corporate tax evasion, offshore tax non-compliance, and tax fraud in all levels of society. A bigger challenge comes from burgeoning public sector expenditure. Every successive British government, over several decades, has sought efficiency savings in the public sector, but has come up across a bureaucratic behemoth which is difficult to shift. The abolition of quangos which duplicate work, such as NHS England, is a step in the right direction, while the digitalisation and AI can further streamline processes.
There are missed opportunities, some of which were first identified in the Taxing Wealth Report 2024. Capital gains tax, which taxes income from the sale of assets, could have been equalised with income tax on employment, the rate of tax relief on pensions could have been restricted, and VAT could have been charged on financial services. In addition, Patriotic Millionaires UK, in a report dated 17 March 2025, advocated a 2% wealth tax on assets over £10 million, charging National Insurance on investment income, a 4% tax on share buybacks, and making the oil and gas windfall tax permanent.
The Spring Statement has come under fire from those on the left and centre of the political spectrum for its austerity policies. Incapacity and disability payments for the disabled and sick are being cut, and some observers fear that as many as 250,000 people could be pushed into poverty. Welfare cuts may affect as many as 3.2 million families. Cuts to personal independence payments (PIP) and health-related universal credit will inevitably disadvantage poorer people, many of whom are facing an uncertain future. Their wealthier counterparts with the “broadest shoulders”, on the other hand, have considerably less pain to feel. The government is particularly concerned about physically able-bodied people with “mental health problems”, who form part of the 2.8 million “economically inactive” due to ill health. While many are genuinely disabled by overwhelming mental illness, others may be the victims of a benefit trap, as low wages, poor working conditions, and harassment by employers disincentivise their return to work. Cutting the ODA budget is probably a false economy, given its positive role in enhancing British soft power across the world.
Britain’s economic growth is being threatened by recent domestic and global events, with “uncertainty relating to productivity and trade policy”, including imminent Trumpian tariffs. While the Chancellor’s pro-growth policies include investment in human capital, infrastructure, and defence production, taxes on jobs through increased National Insurance contributions by employers will soon kick in, particularly to the detriment of small and medium-sized businesses. Britain also has a lot of catching-up to do, to overcome a skills gap and to boost manufacturing, before the productive capacity of the economy can be expected to take off. Business and consumer confidence has also to be restored. Given the prevailing instability, who knows what might happen later in the year? All we can surmise is that taxes might yet have to rise to keep the economy on track.
Ashis Banerjee