Spring Statement update: Walking the fiscal tightrope

Yesterday, Chancellor Rachel Reeves updated Parliament on her plans for the UK economy. Prior to the event there had been a degree of nervousness amongst investors. Weak economic growth, above-target inflation and a tax burden close to record highs had soured the mood, with bond investors demanding a premium to lend to the UK government over counterparts such as the US. Some feared a re-run of former Prime Minister Liz Truss’ disastrous October 2022 mini-budget, which saw bond yields spike and sterling sell-off.

In the end, financial markets shrugged off the Spring Statement. Investors seemed to take comfort from the Chancellor’s decision to cut government spending instead of borrowing or taxing more, at least in the near term. Here are three immediate takeaways:

1. Fiscal headroom wiped out, but the Chancellor remains committed to fiscal discipline  

A central focus ahead of the Spring Statement was whether the Chancellor remained on course to meet her own “non-negotiable” fiscal rules. The Office for Budget Responsibility’s (OBR) updated forecast for the UK economy confirmed that, before accounting for any new policies, she was not. The £9.9bn headroom as at the Autumn Budget has been wiped out amidst higher global borrowing costs and weaker economic growth than forecast¹. Most notably, the OBR halved its 2025 UK gross domestic product (GDP) forecast from 2% to 1%, citing weak productivity, higher uncertainty and interest rates¹.

Despite economic headwinds, Reeves reaffirmed her commitment to fiscal discipline, making a series of policy changes to restore the headroom.

2. Preference to cut government spending over raising taxes, for now 

Having ruled out personal tax increases, and with global investors seemingly reluctant to fund additional government borrowing, Reeves prioritised government spending cuts, including:

• Welfare changes that aim to save £5 billion by the end of 2030²
• 15% cut to civil service administration costs by 2030²

While last month the international aid budget was cut to boost defence spending to 2.5% of national income by 2027².

By some miracle, the changes completely restored the £9.9bn headroom. However, as with any economic forecast, there is significant uncertainty around how the outlook will evolve.

The government is walking a fiscal tightrope as limited headroom and elevated global uncertainty means the Chancellor’s fiscal plans are highly exposed to potential downside shocks. The OBR acknowledged this commenting that the headroom is around one-third of the average headroom Chancellors have set aside since the OBR was established in 2010. It went on to say that “risks to the forecast are heightened at present given the significant uncertainty surrounding domestic and global economic developments”¹. Indeed, the OBR estimates the probability of meeting the fiscal mandate is just 54%¹. Major question marks remain about whether the government can keep its pledge not to raise taxes on working people.

3. Subdued market reaction  

It seems that gilt investors took some comfort from the policy changes. Gilt yields traded slightly lower, helped by a favourable CPI inflation print earlier in the day. Cue sighs of relief at the Treasury. The pound weakened as yields fell.

The government will now be hoping to make progress on its number one mission: to kickstart economic growth. After a slow start, recent policy changes could shift the growth dial. Higher defence spending, civil service reform and closer relations with Europe could all drive activity growth. Reeves also spoke about the government’s ambition to make the “state leaner, and more agile” and turn the UK into a “defence industrial superpower”³. This optimism is reflected in the OBR’s bullish forecasts, which show GDP accelerating to 1.9% in 2026 and growth averaging 1.75% through the remainder of the decade¹. This would mark an improvement on the pre-pandemic growth rate, with the OBR forecasting a medium-term boost from the government’s planning reforms.

For now, though, the UK’s finances remain in a precarious position. Reeves needs an upturn in activity—her plans depend on it.

1. Obr.uk, Office for Budget Responsibility Economic and fiscal outlook, March 2025
2. Gov.uk, HM Treasury Spring Statement, March 2025
3. Gov.uk, HM Treasury Spring Statement 2025 speech, March 2025