Rachel Reeves may not have called her Spring Statement on March 26th a budget, but it certainly felt like one. Speculation grew in the preceding weeks over exactly how deep a fiscal mess Britain’s chancellor had got herself into. Billions in welfare cuts were pre-announced, and then hastily expanded after a spat with the Office for Budget Responsibility (OBR), the fiscal watchdog, over how much they would actually save. The announcements, when they finally came, left Britain’s public finances looking about as rickety as they had been going in.
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Britain, like most of its European peers, is caught in an unpleasant fiscal pincer. On one side is geopolitics: a growing need to raise defence spending, which Britain has funded so far by all-but-ending its independent foreign-aid efforts, plus a looming risk that tariffs and a trade war wreak economic havoc. Ms Reeves stressed that Britain has been buffeted by “heightened uncertainty”. And on the other side is a population that is getting older and sicker, underpinning a pension, health-care and welfare bill that is growing much faster than GDP, or the tax base.
The chancellor managed to punt those challenges forward, for now. After starting £4.1bn ($5.3bn, 0.14% of GDP) in the red on her self-imposed fiscal rule that Britain’s day-to-day spending be balanced by 2029-30, she restored fiscal headroom to £9.9bn —where it was after October’s budget. She achieved this mainly thanks to welfare cuts, paring back raises in departmental spending, a tax-avoidance crackdown and convincing the OBR that housebuilding plans would raise growth (see chart 1).
Pulling off that manoeuvre won Ms Reeves cautious plaudits within her own party, where ire had been brewing over benefit cuts and a surreal micro-scandal where she received free tickets to a performance by Sabrina Carpenter, a Gen-Z pop artist. “Maybe we should have believed her all along,” said one Labour MP.
That optimism could easily sour as the next budget, due in the autumn, draws closer. Gilt yields, which thwarted Ms Reeves’s last attempt to stay on the right side of the fiscal lines, have risen by around 25 basis points (0.25 percentage points) since mid-February, when the OBR froze its forecasting assumptions. That alone will knock Ms Reeves’s fiscal headroom down by a few billion. If Britain were hit by 20% American tariffs, which in principle could come as early as next week, that would also push Ms Reeves’s fiscal space to near-zero, the OBR reckons.
Trouble is more likely to come, though, from a downgrade to the OBR’s forecasts for productivity. These have long been sunnier than those of most other economy watchers, including the Bank of England, enabling successive chancellors to dial up borrowing. Productivity growth in Britain flagged after the financial crisis of 2007-09 and has stayed low for the past 15 years. Recently, it has become even worse. But the OBR, unusually, still expects productivity growth to rebound to well above 2010s levels within a few years (see chart 2).
Without that boost, Britain’s public finances start to look painfully shaky. During the latest round of forecasts, the OBR introduced “upside” and “downside” productivity scenarios—a move that could be interpreted as laying the groundwork for a downgrade in the autumn. In the “downside” scenario, which assumes that productivity growth stays where it is, Britain would land in a £48bn fiscal canyon by 2029-30: a deficit worth nearly half the size of the education budget. Even nudging a little in that direction would be painful.
One way out could be if the government manages to persuade the OBR that the full suite of its reforms to the planning system—only an early tranche of its housebuilding plans were assessed this time—will durably boost growth by enough to cushion a broader downgrade. But that effort could cut the other way too: the OBR also has not scored the government’s planned workers’-rights reforms, which will probably choke growth.
Planning-reform advocates in Labour hope that support from the OBR prompts a virtuous feedback loop, driving ministers to look for more untapped supply-side dividends which could justify career-saving forecast upgrades. “It’s nice to have everything I believe in vindicated,” said one Labour MP in that camp.
But a return to the “tax lever”, which Ms Reeves and Sir Keir Starmer, the prime minister, swore off during the election campaign, may be inevitable. A comparatively painless first step would be to freeze personal-tax thresholds into 2029-30, which would raise around £8bn. Finding much more, though, would almost certainly mean breaking Labour’s unwise pledge not to raise the rates of VAT, income tax, or national insurance in this parliament.
At a minimum, by leaving such a narrow margin of fiscal headroom, again, Ms Reeves has guaranteed a further half year of fiscal shadowboxing ahead of the budget. That uncertainty alone could well weigh down on growth.
Growing pain
Broader economic news has not been inspiring recently, either. Many in Labour hoped that growth would pick up after their election victory, simply by promising less chaos than the country experienced under the Tories. Clearly, that has not manifested itself. Instead, after a surprisingly sprightly first half to 2024, GDP growth sagged after the summer.
Over the past few months, forecasters in the City of London, the Bank of England and the OBR have each shaved down their estimates for growth in 2025 (see chart 3). Hopes for a reprieve from interest-rate cuts have also dimmed. Annual inflation has edged up to nearly 3% and looks set to stay there for much of the year, so a big move by the Bank of England will not happen for a while, absent a serious slowdown.
Optimists point out that the latest purchasing-managers’ index, a decent proxy for growth, picked up unexpectedly last month. And the pain from October’s budget has probably been front-loaded, as businesses grumbled about higher taxes. Over the next few months, the tens of billions in extra public spending that Ms Reeves funded with taxes and extra borrowing should start to hit the economy.
This government’s central bet has been to go all-in on growth—to deal resolutely with fiscal challenges, win back voters flirting with populist outfits like Reform UK and boost Britain’s standing in the world. As a theory of governance, there is much to commend it. But it will take reforming zeal, not just a smattering of sensible fixes, to make that bet come good. Ms Reeves and her colleagues have more to do to prove they are up to the task.■
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