Responding to the Chancellor’s Spring Statement Forecast earlier this afternoon, Helen Miller, IFS Director, said:
“Today’s Spring Forecast did what it said on the tin. It was a forecast, and not much more. There was blissfully little speculation about potential policy changes in the lead up, and no tweaking tax or spending policies on the day. To her credit, she stayed her hand. One major fiscal event per year is enough.
The OBR’s forecast for borrowing improved ever so slightly, driven by strong tax receipts, which were more than enough to offset the cost of various policy announcements and reversals since the autumn. The all-important context is that ongoing events in the Middle East, and the sharp market movements they have induced, have already upended some of the assumptions underpinning this forecast. This is yet another reason to be glad that the Chancellor steered clear of making policy announcements in response.
Peering through the uncertainty, what is newsworthy is not the change in the forecasts since November but the forecast itself. The main fiscal story remains the same. The UK’s public finances are vulnerable. Debt is high, and set to only just stabilise as a fraction of GDP by the end of the decade. Borrowing also remains high. The government plans to bring it down rather rapidly, from 4.3% of GDP in 2025–26, to 3.6% in 2026–27, and 1.8% by 2029–30, at which point all borrowing is intended to be for investment only and for debt to be stable. The big question – which remains as central as ever after today’s statement – is whether those plans can be delivered.
The economic outlook, and therefore the outlook for borrowing, could shift more materially between now and the Budget in the autumn. The conflict in the Middle East is already pushing up oil prices, gas prices and expectations for interest rates. It could yet cause more far-reaching economic disruption. Closer to home, some major OBR forecasting judgements will need to be made, under a new Chair, over the coming months. The forecast path for net migration will be particularly significant. It was revised downwards today to reflect higher levels of outwards migration by UK nationals; it could shift downwards again if the numbers for inwards migration get revised down. That’s entirely possible, not least because bringing down net migration is explicit government policy. On the other hand, the fiscal outlook could improve with stronger productivity and wage growth one potential source of a positive surprise.
Even absent any change in the forecast, there are clear strains and demands on policy coming down the road. Defence – where the Prime Minister has stated his desire to ‘go faster’ – is perhaps the most obvious and most pressing example. Increasing spending to 3.0% of GDP by 2029–30, for instance, could mean finding an extra £14 billion per year or so, relative to current plans. Recent events in the Middle East could add to the pressure to spend more. That could come to a head in the autumn – or sooner.
Looking even further ahead, the 2027 Spending Review will present perhaps the biggest test of the Chancellor’s fiscal plans, which are now underpinned by an assumption that day-to-day departmental budgets will grow by 1.0% per year over the three years from 2027–28. The government topped up these plans from 2028–29 onwards to pay for increases in special educational needs and disability spending. One open question is whether this will prove to be sufficient to meet demand. And there will undoubtedly be pressure to go further, most clearly on defence, but also to meet demands for higher pay from public sector unions and for extra spending on creaking public services. Political uncertainty clearly also adds to the risk around the borrowing numbers.
Finally, the government’s new fiscal operating model – with only one formal assessment of the fiscal rules each year, in the autumn – was not really put to the test today. This isn’t to detract from the credit the Chancellor deserves for making this a non-policymaking event. The prospect of bruising local election results in May would have tempted some to act. But the true test for this framework will come if or when the Chancellor finds herself missing her rules under a future spring forecast, even if those rules aren’t being officially assessed.”
