Tomorrow the Chancellor will give the Spring Statement - which could well double as an emergency Budget - following publication of the OBR’s (Office for Budget Responsibility) economic outlook.
Rachel Reeves has said she won't increase taxes. She has also said won't borrow more, which only leaves one option: to cut spending.
Why? Because the economy isn't growing.
As I wrote back in January, this is necessary for a few reasons 👇
1️⃣ The markets responded poorly to Rachel Reeves’s first Budget, in October 2024, and the cost of Government borrowing increased to levels not seen since 2008 (for 10-year bond rates) and 1998 (30-year yields).
This means that tax revenue is increasingly being spent on interest payments, not public services.
Debt interest is the third-largest Government expense - at £105bn per annum - for 2024/25, you can see more on this here: https://www.thetimes.com/comment/columnists/article/were-paying-more-tax-than-ever-so-why-is-britain-so-skint-j0pd8nx3w
More on this here: https://www.bbc.co.uk/news/articles/c1404j3xmxdo
2️⃣The Chancellor has repeatedly promised there will be “no more borrowing or more taxes” for the duration of the Government’s term (2029, unless they call a General Election), but the £9.9bn of fiscal headroom that was left after the October Budget has been eaten up (either largely or wholly, we'll know tomorrow) by increased interest rates on the Government’s debt (see point 1).
While tax returns were in surplus last year, at £15bn, the problem is that this came way under the OBR's forecast of £21bn.
The October 2024 Budget increased taxes by £40bn. The Chancellor also announced that over the next five years, there will be increases to spending of £70bn and to borrowing of £142bn.
The Chancellor has also pledged, despite the economic outlook, to stick to her new fiscal rule: for day-to-day spending to be funded by tax receipts.
More on this here: https://news.sky.com/story/chancellor-rachel-reeves-promises-she-will-not-raise-taxes-again-13260603
3️⃣ Despite the Government’s insistence that growing the economy is one of its top priorities, the economy shrank by 0.1% in January and the Bank of England and OECD have both cut growth forecasts. The OBR is expected to halve its growth prediction on Wednesday (from 2% to 1%).
Cuts to growth predications come as businesses brace themselves for looming tax hikes, namely the £25bn increase to employers' National Insurance which comes into effect on April 1st.
It's also worth noting that for the first time ever, the number of companies registering at Companies House has fallen. And we know that business confidence is at a similar level as during the pandemic.
More on the growth forecasts here: https://www.cityam.com/obr-growth-forecast-will-be-halved/
❓ So what does this mean?
Increased borrowing costs and a shrinking – or, at best, sluggish – economy have left the Chancellor with little to no fiscal headroom.
The Chancellor’s options are compounded by the promises she has made: no more taxes and no more borrowing.
Leaving the Government with only one option: to cut spending in the emergency Budget.
We’ll know more about the Government's plans for spending cuts tomorrow and after the Spending Review, which has been pushed back to June.
More on the state of the economy and the options available to the Chancellor here: https://news.sky.com/story/uk-government-borrows-more-than-expected-putting-pressure-on-rachel-reeves-13332973
