2025 Spring Statement – A Chancellor with few options who needs some luck

The headlines will focus on the cuts to projected economic growth, but the overarching story was of a Chancellor who, for political reasons, will loathe to cut spending or raise taxes again but is at the mercy of a highly uncertain geopolitical environment which may hurt tax receipts. She has few levers to pull and needs the Government’s programme of regulatory reform to bear fruit (and fast) before the Budget in the autumn. Organic growth in tax receipts from greater economic growth is perhaps the only meaningful way she can secure the fiscal ‘room for manoeuvre’ that all chancellors want.

The Chancellor outlined her plans to reduce public spending, promote growth, and maintain fiscal stability in the face of global geopolitical instability, telling MPs that “the world has changed” since the Autumn Budget in October last year and the resulting need to “act accordingly.”

Today’s statement came amid disappointing news for the Government. The OBR has significantly downgraded the UK’s growth forecast, cutting its prediction from 2% to just 1% for the year ahead. However, on a more positive note, the OBR has upgraded its longer-term growth estimates from 2026 onwards: 1.9% in 2026, 1.8% in 2027, 1.7% in 2028, and 1.8% in 2029.

The Chancellor also faced renewed pressure to meet her self-imposed fiscal rules: not to borrow for day-to-day public spending and to ensure that Government debt falls as a share of national income by the end of the parliamentary term. According to the OBR, without the changes announced today, the Chancellor would have missed her own rules by £4.1 billion due to the increased cost of Government borrowing. Today’s announcements will restore £9.9 billion in budget surplus “headroom” by 2029/30.

As expected, the Chancellor confirmed a further squeeze on the welfare budget, building on the cuts to disability and incapacity benefits announced earlier this month. This new package is expected to save £4.8 billion across the entire Parliament. Despite repeated claims that she has inherited a “broken welfare system,” the Chancellor is already under pressure from many members of her party regarding how these changes will improve living conditions and drive the economy. The Chair of the Work and Pensions Committee, Debbie Abrahams MP, has already gone on record to state that these cuts will lead to “increased poverty” and “worse health conditions.”

The Chancellor also confirmed plans to cut thousands of civil service jobs to reduce costs by 15% by the end of this Parliament. This is anticipated to save up to £2.2 billion a year. Again, the Chancellor is likely to face resistance from unions and members of the public who will likely be affected by cuts in the services they receive. Reacting to the proposed cuts to the civil service, Fran Heathcore, General Secretary of the Public and Commercial Services Union, said that the Chancellor “cannot cut her way to growth.”

Given the current geopolitical uncertainty, it was not surprising that a significant part of today’s statement unsurprisingly focused on defence. The Chancellor reconfirmed the Government’s commitment to spend 2.5% of GDP on defence by 2027. She also articulated her ambition to establish the UK as a “defence industrial superpower,” strengthening the country’s security and technological capabilities.

Additionally, the Chancellor announced a £3.25 billion Transformation Fund to enhance public service delivery, with a focus on improving efficiency and productivity across government departments. This fund aims to drive efficiencies through the use of digital technology and AI while also preparing the public sector for future challenges.

Further opportunities for the business community include the Government committing an additional £13 billion in capital infrastructure investment over the next five years, including funding for the construction of 1.3 million new homes and training 60,000 new skilled workers for the sector.

However, the Spring Statement also confirmed measures that will have a significant impact on businesses across the country. In particular, the increase in National Insurance contributions for employers, which will rise from 13.8% to 15.05%, will be accompanied by a decrease in the earnings threshold from £9,100 to £5,000. These changes, set to take effect on 6 April, represent a £25 billion tax increase on businesses, raising significant concerns about the overall tax burden.

When challenged by MPs, the Chancellor dismissed repeated calls to overturn these measures, labelling them as “non-negotiable.” Consequently, according to OBR projections, tax as a percentage of GDP will rise from 35.5% in 2023-24 to 37.7% by 2027-28 - the highest level since 1948.

Responding to the Spring Statement, Shadow Chancellor, Rt Hon Mel Stride MP, accused the Government of “mismanaging economic affairs and stifling the country's growth potential.” He characterised the statement as an “emergency budget,” suggesting that the Government's approach would lead to higher taxes at the next Budget. The Shadow Chancellor also warned of the potential for trade tensions with the US over the Digital Services Tax, which could result in retaliatory tariffs. Any further tariffs could wipe out the “headroom” that the Chancellor has re-established as a result of today’s statement.

Looking ahead, the Government’s ability to stimulate growth without placing undue strain on households and businesses will be a key test. As the UK continues to experience sluggish economic growth and rising inflation, the Chancellor's strategy will need to evolve to ensure long-term fiscal sustainability and address broader economic challenges ahead.

One thing is certain: the upcoming Spending Review in June will be a crucial moment for evaluating the Government’s capital spending plans and its broader economic agenda. The Chancellor has previously stated that this will require Government departments to find further efficiency savings amounting to 5% of their spending. More tough decisions undoubtedly lie ahead as the Government tries to kick-start economic growth, to deliver its Plan for Change over the coming years.

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