Chancellor Rachel Reeves’ Spring Statement: What to Expect

Chancellor Rachel Reeves’ Spring Statement: What to Expect.

Chancellor Rachel Reeves will update the nation on her plans for the UK economy and provide an economic forecast during her Spring Statement on Wednesday, March 26. While Reeves has ruled out further tax hikes, the UK government is facing mounting pressure to address its financial situation, especially in light of global events and domestic economic performance.

What Can We Expect From the Chancellor?

Reeves has previously committed to hosting one major economic event annually—the Budget—designed to provide families and businesses with “stability and certainty on tax and spending changes.” As a result, government officials have emphasized that the Spring Statement should not be considered a major financial event. Reeves has ruled out any significant “tax and spend” policies for now, signaling that tax increases and government budgets will remain unchanged.

However, given the challenging economic landscape, Reeves is expected to announce spending cuts to help the government manage its finances. Notably, the Chancellor has already committed to reducing government operating costs by 15% by 2030, which is expected to result in the loss of approximately 10,000 civil service jobs. Additionally, a £5bn annual reduction in the welfare bill by 2030 is set to be implemented, with stricter tests for personal independence payments that could affect hundreds of thousands of claimants. There may be further details revealed about these changes in the Spring Statement.

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Reeves is likely to argue that “the world has changed” to justify her approach. She could also outline plans to increase defense spending to 2.5% of national income by 2027, with some international aid funding reallocated to cover this rise. While tax hikes remain off the table, there may be changes to the UK’s tax regime for large firms in an attempt to avoid US trade tariffs.

There are ongoing discussions about adjustments to the Digital Services Tax (DST), which raises about £800m annually from global tech giants like Amazon and Meta. Although some details have already been made public, the Chancellor may hold off on finalizing specifics of the Spending Review, potentially delaying announcements until June or the autumn Budget.

How Will the Day Unfold?

Before Reeves presents her Spring Statement in Parliament, the Office for Budget Responsibility (OBR) will release its economic forecast, offering insight into the UK’s performance and projecting future economic challenges, including the ongoing cost of living crisis. The OBR will also assess whether the government is adhering to its self-imposed borrowing and spending rules.

Reeves will present the OBR’s key findings alongside her economic plans, with the opposition—likely to be Conservative leader Kemi Badenoch or shadow chancellor Mel Stride—responding afterward.

Reeves’ Borrowing Rules

Reeves has two key borrowing rules:

1. The government should not borrow to fund day-to-day public spending.

2. Debt must fall as a share of national income by the end of this parliament.

Despite these self-imposed rules, the OBR’s forecast is expected to show that the £9.9bn financial buffer for meeting these targets has been depleted. Adding to the pressure, UK borrowing was higher than anticipated in February, totaling £10.7bn.

Given the underperformance of the economy, some are speculating whether Reeves will break her borrowing rules, especially with global trade tensions impacting the UK.

State of the UK Economy

Recent figures indicate sluggish UK economic growth. The economy grew by just 0.1% between October and December 2024, while January showed a contraction of 0.1%. A struggling economy hampers businesses’ ability to hire workers and offer pay raises, and lower profits mean the government receives less tax revenue.

In addition to slow growth, inflation is a concern. The current inflation rate stands at 3%, higher than the Bank of England’s 2% target, with projections suggesting it may rise further. This could impact the Bank of England’s ability to reduce interest rates from 4.5%, a development that could make borrowing more expensive, though it would offer better returns on savings.

RELATED: Bank of England Expected to Keep Interest Rates at 4.5%.

Businesses are also facing higher costs, as National Insurance contributions for employers are set to rise in April. These increased costs may be passed on to consumers. Additionally, UK government borrowing costs remain higher than at this time last year. Reeves has warned that a global trade war could further lower economic growth and increase inflation. The UK has already seen a 25% tariff on steel and aluminum products, affecting the economy.

Conclusion

While the Spring Statement may not introduce radical changes, it will set the tone for future economic plans. Chancellor Reeves is navigating a difficult balance between fiscal responsibility and the need for continued growth. With targeted spending cuts, a commitment to defense spending, and a focus on long-term fiscal health, the UK can look to a future where financial stability is a key priority. Reeves’ approach, despite the challenges, reflects her commitment to steering the nation through turbulent times with careful planning and strategic measures.