Is the UK Spring Statement a Budget?

The Labour government said it would have just one budget a year, in the autumn, when it would set tax rates and publish updated official Office of Budget Responsibility (OBR) figures for spending, growth and the borrowing. It acknowledged that, under inherited rules, it would need a half yearly update of the official forecasts in the spring.

It decided to put off a review of public spending plans for the years from 2026 until Spring 2025. The autumn 2024 budget just provided one year’s forecast spending for 2025-6 with no revision to the later years. This Spring Statement is meant to be a public spending review with no tax changes.

Chancellor Rachel Reeves established new fiscal rules to discipline her spending and borrowing plans. These allowed her to spend a bit more for investment purposes whilst promising to avoid any deficit on current account by the fifth year. She now faces a problem. The lack of growth in the economy over the last eight months will lead to a downward revision to future revenues and an upward revision to spending on items like unemployment and sickness benefits, posing her with a problem of how she gets back within the controls whilst leaving some slack for more unforeseen negative events. She may need to find around £9bn of extra revenue or less spending to hit targets.

Under the stated policy, the adjustment will all have to be by spending reductions. That is why there are informed stories about cuts to welfare benefits, and a drive to manage the public sector better. They are seeking to identify waste and need to turn around productivity, which has been falling too far too fast. She will be under some pressure from her party to revisit taxes as well, as many Labour MPs still think there are more tax loopholes to close and more rich people who could be required to pay more. She could change her policy of one budget a year and make tax changes as well.

How much does the UK government tax and spend?

According to the OBR in the current year the UK state will spend £1,276 bn and raise £1,148bn in taxes.

(Totals of tax, spend, debt and borrowing divided by number of households, OBR figures)

The UK is spending more than the US and Japan per head but less than some of the European countries. It has higher taxes than the US and Japan but below the higher levels of some European countries. The present UK deficit of 4.5% of National Income is at the high end in the international comparisons.

Where does all the UK government spending go?

The UK’s largest area of spending is welfare, followed by the NHS. The state spends more on debt interest than on education or defence.

Tackling waste and productivity – Operation chainsaw?

Pat Mc Fadden is a powerful Cabinet Office Minister, close to Prime Minister Keir Starmer, who is trying to help the government deliver better outcomes. He and other ministers are seeking to identify waste. He has also proposed a new approach to managing the public sector, with tougher targets for senior managers and use of bonus payments more directly related to better productivity performance. Poor senior managers will be managed out.

Some have called this Operation Chainsaw, but the minister has been keen to stress this is an exercise in better management, not rash cuts. The Treasury has already put into the forecast figures a 2% per annum productivity gain from here. The public sector as a whole has achieved no productivity gains this century to date, with slow productivity growth replaced by a collapse since the end of 2019. Where the private sector has now recovered lost productivity brought on by Covid-19 lockdowns, the public sector is still experiencing declines.

It is unlikely the policies announced so far will allow the government to beat its own forecasts for productivity for the next five years. Ministers will need to do a lot of work to set and enforce 2% per annum productivity growth. In many cases like the Health Service large numbers of staff are managed by so called independent bodies, limiting Ministerial ability to intervene. The Health Secretary has recently appointed a new Chief Executive for NHS England, the largest of these bodies and will need to define a very different method of working compared to the devolved structure in place.

Identifying cuts in spending

The government is currently holding a public debate on cutting disability and sickness benefits. It is alarmed by the large increase in people of working age registering as unable to work. They wish to experiment further with ways of helping people back into work through training, support packages, hybrid working and mentoring. They are also considering lowering benefits for those not available to work, and or considering some degree of conditionality for receipt of benefits to make it more difficult for people to turn down job offers if they get them.

All this is difficult territory for any government, as many disabled people do need more financial assistance, and may not be able to undertake work. The government is considering slimming the civil service but is not setting numerical targets for reduction. It has announced a substantial cut in overseas aid, reducing it by 0.2% of National Income or £5.7bn.

Spending pressures

There are plenty of spending pressures. The cuts to overseas aid are hypothecated to pay for an increase in defence spending. The government has committed itself to lifting defence outlays by 0.2% of National Income per year by 2027. Public sector wage awards have been generous this year, so there are spending consequences as they flow through. Unemployment is now rising with vacancies falling, making the back to work policy more difficult.

Helping people off benefit into work is the most popular way of cutting welfare bills. There is a large demand for additional subsidised housing, and rising numbers of illegal migrants requires more spending on hotel and hostel accommodation. Ambitious targets to decarbonise all electricity generation by 2030 and to press on with carbon capture and storage will also present large bills for subsidy and investment.

Could there be tax rises?

If the Chancellor sticks to her one-budget-a-year rule she cannot reach for more taxes. She might, however, be forced to do so by circumstance as she wrestles to stay within her deficit targets. There has been rumours of limiting tax relief for cash ISAs. This might not bring in much extra revenue despite the popularity of cash ISAs as a way of avoiding tax on savings interest. Depending on any rule changes, it would probably be easy for investment companies to design near cash ISAs buying short-dated bonds or money market instruments to minimise capital risk and give people an interest return.

What is likely?

It is likely the Chancellor will want to keep her fiscal rules in place and show she can meet them in more difficult circumstances. She could agree a package of welfare cuts designed to limit any Labour MP rebellion, placing the emphasis on improving help and incentives to work. She will persist with including a useful contribution to controlling spending from productivity and improved management. They may add in an AI Investment programme to accelerate productivity gains. Cuts in overseas aid will pay for extra defence. She will want to do more to get the UK building, to accelerate new homes and major investment in energy and transport.

Her other options are riskier. She could flex the rules claiming there will be more investment in five years’ time to justify a bit more borrowing. She could look at further tax measures, bearing in mind how the big tax measures of the last budget hit business confidence and growth. A general loosening of deficit controls runs the risk of worrying markets and putting borrowing rates up. This, in turn, makes the cost of government debt a bigger problem. More taxes might hit confidence further.