Chancellor Rachel Reeves has commissioned a Spring Forecast from the Office for Budget Responsibility, the UK’s fiscal watchdog. The forecast will be published on 26 March, with Reeves delivering a statement in parliament shortly afterwards.
As households and businesses continue to digest the implications of last year’s Autumn Budget, which unveiled £40 billion in tax hikes and £70 billion in spending policies, you are possibly hoping that nothing further will be announced.
The Treasury has previously said Reeves is “committed to one major fiscal event a year to give families and businesses stability and certainty on upcoming tax and spending changes”, which would suggest this is not intended to be a big event.
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However, high borrowing costs and low economic growth have already wiped out the government’s £9.9 billion “fiscal headroom”, according to reports from Bloomberg earlier this month. As a result, speculation is rising as to whether the chancellor will need to reassess this stance.
When MoneyWeek asked the Treasury to comment, they neither confirmed nor denied, simply stating: “The government’s commitment to fiscal rules and sound public finances is non-negotiable. As previously announced, the OBR's next forecast will be presented to parliament on 26 March alongside a statement from the chancellor”.
Spring Forecast: Will Reeves be forced to raise taxes further?
“The Spring Statement is not scheduled to be a tax-and-spend event, so we aren’t anticipating the fiscal announcements you’d normally expect at a Budget – although it is impossible to be certain this will remain the case,” said Tom Selby, director of public policy at investment platform AJ Bell.
“That doesn’t mean it won’t be consequential, however, with the OBR forecasts setting the scene for the country’s finances and potentially paving the way for more difficult decisions later in the year,” he added.
Selby told MoneyWeek that the Treasury could face some big questions if the OBR forecast reveals that Reeves’s “fiscal headroom” has been wiped out, as anticipated. It will need to decide whether tax rises or spending cuts will be used to balance the books. Deciding which areas to target will be challenging too.
“Given the severe criticism the government has faced following the hike in employer National Insurance and the subsequent downgrade in growth forecasts, it seems unlikely further substantial hits to businesses will be on the table,” he added.
A recent survey of 52 leading retailers, conducted by the British Retail Consortium, revealed that 56% of respondents plan to reduce employees’ hours or overtime in response to the National Insurance changes. Around half are planning to reduce their headcount, and around 67% are planning to hike their prices to help offset the costs associated with a higher wage bill. All of this could prove damaging to the government’s growth mission.
Furthermore, some commentators argue that the government has backed itself into a corner by promising not to hike the three main taxes – income tax, employees’ National Insurance contributions, and VAT. Collectively, these accounted for more than 60% of total tax receipts in 2023/24.
With this in mind, Selby suggests that scaling back public spending could be the only remaining option. This too will be “extremely challenging both practically and politically,” he says, “particularly as the chancellor has committed to not returning to the austerity policies adopted by George Osborne in the wake of the financial crash”.
Treasury says fiscal rules are “non-negotiable”
At the end of January, the House of Commons voted to bring Reeves’s new fiscal rules into law.
The first is known as the “stability rule”. This ensures that day-to-day spending is matched by tax revenues, so the government is only borrowing to invest. The second is known as the “investment rule”. This requires the government to reduce net financial debt as a share of the economy.
The Treasury reiterated to MoneyWeek that these rules are “non-negotiable”. Against this backdrop, it sounds as though Reeves could be in a tough spot. However, the economists at European bank ING recently argued that meeting the fiscal rules is not quite as hard as it sounds.
They said: “Remember that the fiscal rules are based not on actual budget deficits/surpluses right now, but where they’re projected to be in five years’ time. That allows for plenty of creative accounting about what the future holds.
“In the aftermath of the 2022 ‘mini-Budget’ crisis, then-chancellor Jeremy Hunt won round investors and the OBR by promising big real-term spending cuts to various government departments in three to five years’ time. Three years on in 2025, the reality is quite the opposite. Real-term spending is set to increase – by a lot.”
ING believes the Treasury is likely to do something similar this time around, if the OBR reveals that Reeves’s fiscal headroom has been used up, probably focusing on future spending cuts rather than future tax rises.
“The lesson from 2022 is not to be fooled into thinking that will necessarily imply dramatically lower spending in the next financial year,” the bank’s economists added. “More likely, the heavy lifting will come by paring back spending plans in future years, which ultimately may never materialise.”
Alternatively, the chancellor could look to other seemingly invisible options. “On tax, there has been speculation that Reeves might extend the Tories' freeze on tax thresholds beyond 2028, despite her previous pledge to end the freeze,” says Ian Cook, chartered financial planner at wealth management firm Quilter Cheviot. “This 'taxing by stealth' has been a common move by policymakers when faced with difficult choices,” he explains.
The move would almost certainly prove unpopular, though, and be seen as a direct U-turn on what was announced in the Autumn Budget. At a push, it could even be seen as a broken manifesto promise given taxpayers would effectively find themselves paying more income tax as a result.
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