The Chancellor Rachel Reeves gave an update on her plans for the UK economy and an economic forecast in her Spring Statement, on Wednesday 26 March.
This was not intended to be a mini-budget. When she took the job, she committed herself to just one major fiscal event each year to give families and businesses stability and certainty on upcoming tax and spending changes. But a lot has changed since the Autumn Budget last October, when tax hikes of £40 billion and spending policies of over £20 billion were announced, along with optimistic forecasts for economic recovery.
Figures published last week showed that government borrowing came in higher than forecast in February, at £10.7 billion. The UK economy is underperforming, and rising prices may not be beaten after all with the latest figure showing stubborn 2.8% inflation.
It all means Rachel Reeves has a £15bn black hole to fill with none of the growth she was relying on to fill it with.
But despite the problems, and with tax revenues well below the forecasts, the government wants to spend more on defence, on building the UK’s green infrastructure, and on home building. Clearly, something would have to give.
This appeared to have left the government with three options: raise taxes, cut spending, or change the fiscal rules – the way the government constrains its own decisions on borrowing, spending and taxes.
Ms Reeves had come out in recent days to quash speculation about some sort of tax rise in her speech, given the negative reception from the Autumn Budget and the drag that those tax-raising announcements seem to have on growth and confidence.
The only way to balance the books it seemed would be targeted spending reductions. Cuts to health-related benefits, the closure of NHS England and 15% reduction of the Civil Service budget were all already announced.
Low growth figures, combined with higher-than-expected borrowing, put pressure on Ms Reeves to slash Government spending.
Some of these measures had already been announced in the weeks up to the Spring Statement. But with the Office for Budget Responsibility delivering devastating news that benefit reforms would deliver much less than planned, there was plenty of speculation about what else would be announced in the statement itself.
So, what was announced?
The Chancellor acknowledged that "the world has changed" since her budget just under five months ago, and those changes would be behind the additional cuts and downgrades she outlined to MPs.
Welfare
As predicted, Rachel Reeves announced fresh benefit cuts after the spending watchdog said her reforms would save less than planned.
It follows last week's controversial decision to slash £5billion from sickness and disability benefits - with major changes to Personal Independence Payments (PIP).
Under the new measures incapacity benefits for new claimants will now be frozen until 2030 rather than increased in line with inflation. However, the universal credit standard allowance will increase from £92 per week in 2025-26 to £106 per week by 2029-30, while the universal credit health element will be cut by 50%.
The total savings from the package will be £3.4bn, she says, citing a forecast from the OBR.
Whitehall spending
Ms Reeves pledged to cut Whitehall spending.
She has confirmed plans to order Whitehall to cut their administrative budgets by 15%, expected to save over £2bn a year by 2029/30.
The changes are also expected to result in as many as 50,000 Civil Service jobs being cut.
On departmental budgets - which dictate how much different parts of government can spend until 2030 - Ms Reeves said she aims to make the state "lender and more agile".
She announced a new Transformation Fund which will work on bringing forward £3.25bn of investment to deliver the reforms that she says public services need, which suggests that increased technology and in particular AI will be used to streamline how public serviced are delivered.
Defence
Earlier this month, Sir Keir Starmer promised to increase spending on defence to 2.5% of GDP from April 2027.
Ms Reeves confirmed the increase – along with an extra £2.2bn for the Ministry of Defence next year.
She said: “We will spend a minimum of 10% of the Ministry of Defence's equipment budget on novel technologies including drones and AI enabled technology.”
The benefits – aside from national security – would include supporting advanced manufacturing, creating demand for highly-skilled engineers and scientists, and delivering new business opportunities for UK tech firms and start-ups.
Tax rises
Ms Reeves confirmed she would not raise taxes but instead would launch an ambitious package of measures to crack down on tax evasion, aimed at raising an extra £7.5bn by the end of this decade - an extra £1bn.
New technology will help HM Revenue & Customs catch 20% more tax fraudsters, the Chancellor said.
From next tax year onwards (2025/26), the Treasury will increase late payment penalties for VAT and Making Tax Digital for Income Tax Self Assessment.The penalty will increase from 2% to 3% at 15 days, 2% to 3% at 30 days, and 4% to 10% from day 31.
To help enforce the new regime, Reeves will earmark around £80 million for third-party debt collectors to bring in £1.3 billion in outstanding tax over the next five years. The Treasury says the collectors will return £16.25 for every £1 spent on their employment.
Cash ISA rumours
In recent months, the future of Cash ISAs has been at the heart of frantic speculation. Ms. Reeves was rumoured to be looking at cutting the annual allowance from £20,000 to £4,000 – part of a bid to get Britain investing and boost UK growth.
These plans now appear to have been shelved, for the time being at least.
Where does this leave us?
The Spring Statement actually looks quite moderate in scope, with most of the pain restricted to those on benefits, and to Civil Servants and NHS bureaucrats. Worries about blanket tax increases have proved unfounded – at least for the present.
But remember, most of the £40billion worth of tax and other changes announced by the Chancellor in the October budget have not yet come into force. They will start to impact from next month, when a National Insurance increase, a freeze on income tax thresholds and a rise in stamp duty are implemented for the new tax year.
This prospect – and the impact on business confidence that it has had - have been among the reasons why the Office for Budget Responsibility has halved the UK growth forecast for 2025 from 2% to 1%.
It looks as though the Chancellors optimistic outlook back in the Autumn has not lasted over Winter.
But although the confidence of the country may have taken a knock, it seems that there remains a view among some hedge funds and global wealth managers that the British economy actually is gradually recovering from a string of shocks, including the Covid crisis, and Putin’s gas squeeze, and may prove to be an outperformer in the years to come.
What should you do?
There could still be trouble ahead, in the form of tax increases if the Chancellor is to balance her books, but there could be opportunity too, especially if the governments focus on investment is maintained.
None of us can predict what the future holds, but it is possible to prepare for it, with a sound financial strategy.
For help with your own economic outlook, and with developing a financial strategy to make the most of it, call us at Continuum.
Rachel Reeves delivers Spring Statement – live analysis | Moneyweek
Spring statement at a glance: What was in Rachel Reeves’ announcement? | msn.com
Government borrowing higher than expected in February - BBC News
Inflation falls to 2.8% in boost for Rachel Reeves ahead of spring statement | The Independent
Spring Statement 2025: the most important points from Rachel Reeves speech
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