The Spring Statement was optimistic

The Spring Statement from Chancellor Rachel Reeves, as expected, led to a halving of the forecast growth for 2025 and confirmed a substantial package of welfare cuts to get spending back within the fiscal rules. There were no further tax rises, with most of the £40bn of tax increases from the last budget due to affect people and business from the beginning of April.

The Office for Budget Responsibility (OBR) increased its growth forecasts a little for each of the years from 2026. They largely attributed this to anticipated planning reforms leading to more housebuilding in the second half of the parliament and to improved productivity.

The gilt market left ten-year rates around 4.7%, reflecting the government’s aim to keep borrowing down in the fifth year to the targets set last time. The OBR reported that, after the government cuts of £12bn in projected 2029 spending and £2bn of extra tax revenue, the government should meet its fiscal limits by a small margin. Borrowing will be £3.5bn higher and debt to GDP 0.6% of GDP higher than in the October forecast.

The forecast is optimistic

The OBR expect 1% growth this year compared to the Bank of England’s 0.75%. The OBR is more optimistic than the Bank and the average forecaster on growth, inflation and unemployment.

The forecast does not assume big changes to tariffs, though we learned yesterday that the US is imposing a 25% tariff on UK car and parts exports to the US. The UK vehicle industry is already struggling, mainly owing to the required transition to battery vehicles which is encountering substantial customer resistance.

The forecast assumes a big pick up in the poor rate of productivity growth. This will require more detailed and successful policies to turn round the deep decline in public sector productivity. It will also require changes in the private sector, where productivity growth is weak. This is partly owing to the decline of capital-intensive activities such as oil and gas, refining, petrochemicals, steel making and vehicle assembly. Some of these will continue to shrink as part of the government’s net-zero drive.

The forecast does not evaluate the government’s Employment Rights Bill. This is expected to add at least £5bn more to business costs and is seen as a negative by many employers. The OBR implies it will be a negative and has promised its incorporation into the next forecast.

Are house building targets realistic?

Will the UK reach 300,000 new houses a year within the forecast period?

The OBR thinks this will happen. It is, however, important to remember the government’s proposals to date mainly target the issue of planning delays and blockages. Even these have not all been resolved, with environmental considerations continuing to require extensive study and reports on habitats and nature. The building industry needs to expand capacity. Government help is going to become available for training more staff.

The bigger issue is affordability. House prices are high particularly in London and the South East where there is most demand for homes. The wish of many people to have a home cannot often be translated into effective demand given prices and the costs and availability of mortgages. It will be difficult to get to 300,000 new builds without further changes. The OBR forecasts more increases in house prices to come.

The current government is seeking to continue the previous government’s work on the Oxford to Cambridge corridor where there are good opportunities for substantial new settlements along the route of the new and improved railway line. It is taking time to identify the areas and progress with the necessary consultations and planning frameworks. Half the railway line should be completed this year.

The plight of the car industry

The UK car industry has seen a sharp decline in output over the last year. February 2025 saw another 33% fall in car output for the domestic market and a 7.6% overall fall. This is before the impact of the US 25% tariff. UK exports to the US have been growing whilst exports to the EU have been falling.

The industry is finding it difficult to sell enough of the new battery models it has developed. Given the £15,000-a-vehicle tax on sales of diesel and petrol cars over the maximum 72% of the total sales they are allowed, there is a perverse incentive not to sell the more popular vehicles as they struggle to get the battery percentage up.

The UK has not imposed additional higher tariffs on Chinese vehicles, so the UK industry also faces intense price competition in the battery car sector from the Chinese. Factory closures and job losses in the sector are not helpful and serve to depress productivity as this is a capital-intensive industry.

Productivity is also hit by the bans on new oil and gas investment, the closure of the blast-furnace-based steel industry and the progressive decline of high energy using industries generally, given the high energy prices.

Markets take statement in their stride

The government did enough to reassure the gilt market, by finding £14bn to get back within its fiscal rules for the end of this decade. The current year sees a major downwards revision to forecast. This reminds us of an optimism bias in the recent OBR work. A 0.6% increase in interest rates would blow away the margin in the figures for the 2029 fiscal rule, as would a failure of productivity to pick up as the OBR expects. Substantial tariff rises could also remove the margin of safety. On the optimistic side if the Bank of England manages to engineer lower rates that helps, and if productivity does pick up as imagined the figures become more realistic.

It seems likely there will be negative speculation in the run up to the11 June presentation of the Public Spending Review. Given the increases in Health and Defence spending, there will be other departments facing cuts, which may be contentious with Labour MPs and with a wider audience. Thereafter, there may well be lobbies wanting more of the adjustments to be made by higher taxes, with speculation ahead of the autumn budget over whether the Chancellor will change her mind about the desirability and feasibility of more tax rises.

The economy must weather the inflationary and negative impacts of the large National Insurance rise coming in April, and the effects of any US tariffs aimed at UK exporters. The Spring Statement was a holding statement. For it to work, the government must now show how it will get more housing and infrastructure built, how it will get many more young and disabled people into jobs, and how it will handle a difficult spending round for the public sector.