Key Predictions for the Spring Statement on 26th March

The Chancellor has had her fiscal headroom of an estimated £9.9 billion wiped out by the combination of higher borrowing costs and flatlining growth — with some predicting she could miss her fiscal target by as much as £1.6 billion due to a rise in bond yields.

Traditionally, the Spring Statement would give a chancellor the opportunity to provide an update on the nation’s economic outlook and public finances, without major policy announcements.

However, since October’s Budget the economic landscape has dramatically changed. The Bank of England has slashed its 2025 GDP growth forecast in half, from 1.5% to 0.75%, and inflation is now projected to remain above 2% until at least 2027. As a result, we can expect to see substantive measures announced by the Government on and in the lead-up to 26th March.

What can the Government do?

Option 1: Changes to borrowing rules

While the Chancellor established the Government’s borrowing rules in the October Budget to allow for greater public sector investment spending, she has the option to change these self-imposed rules again to grow the fiscal headroom.

While current rules mandate that day-to-day spending be financed through revenue (not borrowing), the rapidly evolving international environment means that extra funds are needed to finance vital sectors, notably defence. Friedrich Merz, Germany’s chancellor-in-waiting, is currently pushing for a change in Germany’s debt rules that would facilitate €500 billion of infrastructure spending over 12 years to turbocharge the economy and exempt some defence spending to ensure national sovereignty and Europe’s defence.

With the UK economy struggling and increases in defence spending announced, is it likely that Rachel Reeves follows suit? Not really — the Government has often stressed the point that they will not borrow to fund day-to-day spending, and the fear and repercussions of upsetting the bond market even further is too strong.

Option 2: Tax rises

This Government ran for election on a platform promise that they would not directly raise taxes on working people, and they are unlikely to divert from this strategy by making changes to income tax rates. However, they have shown themselves willing to alter taxes — Employer National Insurance Contributions are one example — and there have been rumours of reforms to Individual Savings Accounts (ISAs). Proposals include capping cash ISA holdings to encourage investment in equities, although these changes are unlikely to happen immediately.

What will almost certainly happen is a prolonged freeze on income tax thresholds, perhaps by an additional two years. By not increasing thresholds in line with inflation, they effectively operate as a hidden tax increase — a ‘fiscal drag’ — allowing the Government to increase tax revenues without breaking their manifesto pledges.

Option 3: Spending cuts

The most likely route that the Government will take to fill the fiscal gap is to cut spending, with reforms to the welfare system — particularly the Personal Independence Payments (PIPs) — already announced in the House of Commons by the Secretary of State for Work and Pensions, Liz Kendall. Through this route, the Government is hoping to save over £5 billion.

While this will undoubtedly spark heated debate around the impact on some of society’s most vulnerable groups, the Government continues to hold the immense political capital that a large parliamentary majority provides them. While many in the Labour Party may feel uneasy with a cut to the welfare state, it is unlikely that there will be any trouble in passing such measures through Parliament.

What next?

As we move ever nearer to the Spring Statement on 26th March, speculation will be heating up, as the country’s eye returns to the domestic economy after a start to the year heavily dominated by international events.