One of the most surprising aspects of yesterday’s Spring Statement is that in 2029, according to the Office for Budget Responsibility (OBR), the size of the economy will be bigger than it previously expected, reaching £3,433 billion. This compares with the £3,367bn that the OBR forecast last October.
This is largely because the OBR is upbeat about the outlook for growth from next year onwards. For this year, the OBR cut its growth forecast from 2% to 1%, noting that one-third of this reduction was due to ‘structural weakness’ linked to low productivity and two-thirds because of cyclical factors, which it largely expects to be reversed next year with lower gas prices and lower interest rates, allowing slack in the economy to be then used up.
As a result, it expects growth of 1.9% in 2026 and around 1.75% over the remainder of the decade, as the workforce rises. The economic consensus sees growth of 1% this year also, and 1.3% next. It is the OBR’s projection for future productivity that leaves it optimistic relative to other forecasters. It continues to expect productivity to recover and outstrip its recent trend.
It is this economic projection that gives rise to three key takeaways from yesterday’s Spring Statement.
First, is that supply-side policies are expected to work. The OBR’s approach to dynamic provisioning has frequently left it open to criticism. This is where it scores the likely impact of government policy on future growth. Often it takes a dim view of a government’s wishful thinking, but not in this statement when it comes to planning reform.
These reforms are seen as boosting house building and in turn raising growth by 0.2% per year, which is the largest-ever policy boost that the OBR has expected to succeed. While still only a forecast, it fits with what many economists think. Too often these fiscal events focus on boosting demand, led by the government spending more money, but it is the supply-side where the answer to Britain’s weak growth lies. This should set any government thinking about what other supply side measures it should consider.
Second, is how worrying the debt outlook is. Despite such a relatively upbeat forecast for growth from 2026 to 2029, the fiscal numbers still look really poor. Public sector net debt remains high, but largely flat, at 95.9% of GDP this year and 96.1% in 2029/30.
When debt is this high it leaves the fiscal numbers vulnerable to weaker growth or higher borrowing costs. Growth could be hit not only by events overseas – such as tariffs – but by policy measures at home.
The OBR, for instance, did not factor in any impact from the forthcoming Employment Rights Bill, but it will do so by the autumn Budget and all the signalling from firms, particularly small and medium sized enterprises, is that this impact will be negative, alongside the imminent increase in National Insurance.
Meanwhile, this summer’s comprehensive spending review will still see a real terms increase in annual expenditure, even though the Spring Statement saw a cut in the planned growth in departmental spending. That cut, alongside the squeeze on welfare announced yesterday, has led to talk of austerity despite the rising public expenditure bill, as it will leave unprotected departments facing a squeeze.
Third, the policy countdown to the autumn Budget has already begun. The Government has a combination of five options to curb its debt: growth, reform, austerity, tax or borrow. Some might add, inflate the debt away as sixth, which is not a credible option and would require the Bank of England to print money on an even bigger scale than its previous escapade with quantitative easing.
Debt, spending, tax and borrowing are all high and can’t credibly keep rising. Spending must be brought seriously under control and stringently assessed. If not, then borrowing yields will rise and tax resistance will force people to continue to leave or retire.
The opposition to spending cuts may be followed by pressure for higher taxes instead. But the tax take is already at an all-time high, and our welcome progressive tax system is already seeing high earners foot the bulk of the income tax bill. We also tax property heavily, albeit stupidly, through stamp duty that hits turnover.
It’s necessary to push back against proposals for new taxes, such as wealth taxes, as if they offer an easy way out of the UK’s problems. The reality of course is that they don’t, instead being a diversion from the issues of curbing the growth in public spending and raising economic growth. Few countries globally have a wealth tax, with the number in the OECD falling from 12 in 1990 to three now – and in those, thresholds have risen and rates fallen. Like most new taxes, workers and the middle classes pay them, not the mobile wealthy. For the UK to raise a wealth tax would send a very negative signal about the outlook, disincentivising entrepreneurs and wealth creators, and discouraging them from investing and creating jobs here.
This may not augur well for the economy, which may not be able to withstand even higher taxes. Ahead of the October Budget last year, economic confidence suffered as people and firms worried about what lay ahead. In part, that was driven by the cautious messaging then by the PM and Chancellor.
There is a danger of a repeat this year, as the Chancellor has made herself a prisoner of her own self-imposed fiscal rules and she is now a hostage to fortune. A more difficult – or perhaps one might say, more realistic – economic outlook would see the Chancellor soon breaching her fiscal rules again. Growth may be weaker, reform may take longer and thus the focus in the autumn may turn to a combination of austerity, tax and borrow.
The Centre for Policy Studies is hosting ‘Forward March or April Showers? The Spring Statement dissected’ at 9.30 a.m.on Wednesday April 2, featuring:
- Shadow Chancellor Rt Hon Mel Stride MP
- Prof. David Miles, a member of the OBR’s Budget Responsibility Committee
- Alys Denby, Opinion and Features Editor – City AM
- Robert Colvile, Director – CPS (Chair)
For tickets to the event, click here.
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