Rachel Reeves didn’t want today’s Spring Statement to be seen as a budget, but a budget it has turned out to be. The Chancellor has had to find £15 billion of spending cuts across welfare and the rest of government. Rising borrowing costs at the start of the year chipped away at her headroom and the Office for Budget Responsibility (OBR) has now confirmed that the £10 billion margin she left herself in the autumn was wiped out. Had the Chancellor not acted today she would have broken her ‘ironclad’ fiscal rule by more than £4 billion – a £14 billion swing since the Budget.
The spending cuts Reeves has just announced recover that headroom, leaving her with £9.9 billion at the end of the forecast period – a very small margin for error. ‘The Chancellor has learned nothing from the failure to provide enough headroom at her first Budget’, said shadow business secretary Andrew Griffith.
But the headline takeaway from the OBR’s forecast is a halving of growth projections – down to 1 per cent this year, followed by 1.9 next year, 1.8 per cent in 2027, 1.7 per cent in 2028, and 1.8 per cent by the end of the forecast period. These bleak predictions of stagnation leave the government with little room to manoeuvre.
There was a worsening picture for inflation too, with the forecasts expecting prices to rise at an average of 3.2 per cent this year – up from the 2.6 per cent that had been forecast in October. Inflation won’t fall back to the Bank of England's 2 per cent target until 2027.
Compared with October though, and despite her pledge to grow her way out of Britain’s economic and fiscal crisis, Reeves has increased borrowing plans. This year her plans have the government borrowing £10 billion more than had been planned for in October – and £47.5 billion more over the whole forecast period.
On welfare, Reeves confirms that the OBR did not agree that the government’s spending cuts, announced last week, tot up to £5 billion. After further benefits cuts are factored in, the OBR have scored the welfare reforms at just £3.4 billion – a tiny cutback in a bill that is set to soar to £100 billion, just for sickness and disability benefits in the next five years.
Spending on public services will grow faster than inflation but will be lower than the Chancellor had set out in the Budget. That means in 2029/30, day-to-day spending will fall by over £6 billion.
The Chancellor is also stubbornly sticking to her £25 billion raid on employer’s National Insurance which the OBR previously said would damage the workforce participation rate. Nothing changes in this set of forecasts: the OBR has employment falling across the five year forecast period – though the overall rate will be higher than they had forecast last October.
What’s more, the OBR has neglected to score the negative effects of Labour’s ‘make work pay’ plans because there ‘is not yet sufficient detail or clarity about the final policy parameters’ – though they do say the effect is likely to be ‘net negative’. When economists do assess these policies it could cast serious doubt on the growth forecasts we’ve seen today.
The most depressing reading from the OBR’s report though was on productivity. They forecast output per hour work as being permanently lower after today’s measures are taken into account. Britain won’t get out of its no growth quagmire unless that changes.
Bad news on tax too, despite no policy changes today – as Reeve had promised – we’re now just a year away from the tax burden reaching its highest level in history. In two years time it will hit 37.4 per cent of GDP and will beat the post war record level of 1948.
Attempting to move away from cuts and the cries of ‘austerity-lite’, Reeves promised investment, deregulation and extra defence spending in her dash for growth. The Ministry of Defence will receive a £2.2 billion increase this year thanks to cuts from the foreign aid budget and a raid on the Treasury’s reserves. She’s able to increase spending here without denting her headroom because she has reclassified day-todday spending as investment.
Reeves’s most upbeat note came as she claimed planning reforms will boost GDP by 0.4 per cent within the next decade. ‘That is the biggest positive growth impact that the OBR have ever reflected in their forecast, for a policy with no fiscal cost’, she said. Certainly a move in the right direction, but if Britain is to ever get out of its malaise there’s a long long way to go.
What’s most remarkable about this Spring Statement is the increasingly influential role of the OBR. Reeves’s tweaks have taken her £9.9 billion headroom back to £9.9 billion almost within the penny. Continuing to make policy in this way is what leads to obscure tinkering to PIP assessment rules and a spending envelope that appears nothing more than fantasy. Whilst we’re far better off relying on an independent forecaster it’s no recipe for serious reform. The risk now, as the IFS’s Paul Johnson points out, is that we spend the summer speculating about the tax rises that must surely be coming if borrowing costs rise again, or forecasts change and the Chancellor’s £10 billion margin for error is wiped out again.
Join our Coffee House Shots panel alongside special guests Lord David Frost and Lord Maurice Glasman, at Cadogan Hall on Thursday 27 Match at 7pm, to discuss the Spring Statement. Book now.
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