Niels Bohr — “Prediction is difficult, especially if it’s about the future.”
How did we get here?
The Chancellor’s Spring Statement and presentation of the Office for Budget Responsibility’s forecast on 26 March has proved what we already knew — there is no instantaneous or easy cure to the economic malaise the UK finds itself in.
The difficult financial landscape that this Government inherited has deteriorated significantly in the months since their first Budget in October. Domestically, increased government borrowing costs, flatlining growth, and rising inflation — recorded at 2.8% for February and set to rise higher in the coming months — have dogged economic recovery.
Internationally, the opening months of the second Trump presidency has threatened a global tariff war, a slower growing global economy, and, potentially, a lift in global inflationary pressures — and a conflict continues in Europe and the Middle East.
Stopping the rot
In October, the OBR forecast that the Government budget would be in surplus by £9.9bn by 2029-30, but the recent economic downturn led the OBR to revise its prediction to a £4.1bn deficit.
Reversing this deficit is crucial if the Chancellor is to stick to her self-imposed ‘Stability’ and ‘Investment’ fiscal rules. The ‘Stability rule’ requires the Government budget to either be balanced or in surplus by 2029-30. The ‘Investment rule’ necessitates total Government debt falling as a share of the national income by 2029-30.
In her statement, the Chancellor said that sticking to these rules was “non-negotiable,” and that this imbalance has been corrected by a £14.1bn swing resulting from the Spring Statement.
How has this been achieved? The £14.1bn package is made up of a combination of cuts to welfare spending and day-to-day departmental budgets, tighter tax compliance measures, and a boost to GDP — and thus tax revenues — largely stemming from planning and infrastructure reforms as well as an increase in defence spending.
Calming the financial markets
If the Chancellor is to meet her fiscal targets, the economy must grow and the cost of the State must fall as a percentage of GDP. The slashing in half of the OBR’s forecast for growth in 2025 to 1% is certainly a setback.
Yet, this was a Spring Statement to calm the nerves in the financial markets, thus avoiding a spike in bond yields, and aiming to lay down the foundations for long-term sustainable growth.
The Chancellor was keen to reassure the financial markets by announcing that the Investment and Stability rules would be met two years earlier than previously expected — a claim that has been independently verified by the OBR.
In addition to financial stability, she was able to offer more than a glimmer of hope — the OBR predictions for growth have been upgraded to 1.9% in 2026, 1.8% in 2027, 1.7% in 2028, and 1.8% in 2029. But so much will depend on events beyond the Chancellor’s control – and in particular, any fall out from a trade war.
There is some relief for those struggling with the cost-of-living crisis, as the Chancellor announced that the average real household disposable income would grow by £500 per year during the rest of this Parliament. If these predictions prove to be correct, then the nation will be in its strongest financial condition for many years, certainly since the Global Financial Crisis in 2008. However, these projections are hotly disputed by independent analysts with some suggesting that those on the lowest incomes will be £500 a year worse off by 2029/30.
No shortcut to growth
The Chancellor has said there is no shortcut to growth. Housebuilding and defence will be two key sources of stimuli if a path to growth is to be found. The Government has a target of 1.5m new homes by the end of this Parliament, and their commitment to supporting the sector in hitting this target has been reaffirmed by their planning and infrastructure reforms. Reaching this figure will give a significant boost to various sectors of the economy. But many are asking: where will the workers come from? The ongoing skills shortage may frustrate these plans, with forecasted slow productivity growth an added worry.
The rapidly evolving geopolitical landscape means that increased investment in the nation’s defences has become an increasingly high priority. While a more dangerous and unstable world is nothing to aspire to, it does provide opportunities for greater investment in the industries and regions that drive the defence sector.
The Chancellor has set out her stall on the basis of optimistic forecasts for growth from 2026 onwards, but we must remember that we live in an era of increasing uncertainty and complexity. She would do well to remember the words of Niels Bohr, the 1922 Nobel Laureate — “prediction is difficult, especially if it’s about the future.”
Economic Adviser to MHA
