Rachel Reeves’s first UK Spring Statement as Chancellor will take place on March 26. With the Government’s every move under close scrutiny following an eventful first period in office, we can expect it to be a well-watched event.
The Chancellor has continued (publicly at least) her commitment to the Autumn Budget being the single annual fiscal event. This means that on paper, the Spring Statement should be nothing more than the Government’s response to the latest economic forecast from the Office for Budget Responsibility rather than a key calendar event for making major tax and Treasury spending announcements.
Yet given the precarious state of public finances, economic underperformance, global factors such as Donald Trump’s trade tariffs, and the comfort of a £9.9bn Government surplus to meet stringent fiscal targets having been eroded (the OBR’s forecast is expected to confirm this on March 26), there is the real potential that the Chancellor will need to break her self-imposed rules.
The main two of these “non-negotiable” rules are not to borrow to fund day-to-day public spending and to get debt falling as a share of national income by the end of this parliament.
If there is a volte-face on these rules, it will undoubtedly mean the Chancellor, Prime Minister Sir Keir Starmer, and the Government are fielding some difficult questions, and their decisions will have significant impacts on businesses and the public.
So, what can we possibly expect on March 26 if the forecast is downbeat and Reeves has to react?
One option is to extend the freeze on tax thresholds, currently set to end in 2025, meaning more people fall into higher bands as their wages grow. Pursuing this strategy is estimated to generate around £5bn per tax year and was left off Reeves’s first Budget last Autumn.
Another (likely) option is to reduce the generosity of spending plans, particularly in the public sector. It has already been well-trailed that welfare spending is in the firing line. There is also expected to be a reduction in the £20,000 annual tax-free cash ISA limit.
One bright spot is that other tax increases look unlikely as the Government:
- has previously confirmed that corporation tax will be retained at 25% for this parliament, together with full expensing for capital expenditure,
- increased headline rate of capital gains tax to 24% last October,
- committed to no further increases in inheritance tax rates and will undoubtedly be conscious of the ongoing fallout of the ‘family farm tax’, especially amongst the agricultural community.
So, whichever path the Chancellor goes down is likely to be unpopular amongst many portions of the population and will set the tone for future announcements.
The prudent approach would be for Reeves to prioritise policy stability and argue that the worsening of the finances is not material and that any tax changes can wait until the Autumn Budget, leaving spending cuts as her immediate tool for growth.
But in these uncertain times, it is difficult to predict the outcome ahead of the event.
Analysis is easier after the fact, and that’s why BHP is holding its UK Spring Economic Update – Insights and Implications at Impossible York on March 27 from 8 am.
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