The Uncertainties In The UK’s Spring Statement

By Linda Yueh, Adjunct Professor of Economics, London Business School

Every fiscal event, whether it’s a Budget or GDP growth forecast, has to manage uncertainty. But, the Chancellor’s Spring Statement today has more than its usual share. It’s not just to do with the looming “world tariff day” of April 2^nd, as proclaimed by U.S. President Trump, but with the upcoming Spending Review.

The Chancellor has set her fiscal rules in order to achieve stability and support economic growth. This is particularly challenging during a time of high uncertainty.

Undoubtedly, an impending set of tariffs adds considerable uncertainty to the UK’s economic forecasts. British trade officials are negotiating to exempt the UK from taxes on its exports that would likely dent growth. The independent fiscal body, the Office for Budget Responsibility (OBR), concluded that “if global trade disputes escalate to include 20 percentage point rises in tariffs between the USA and the rest of the world,” that could reduce the UK’s economic growth by as much as 1 percent. It would wipe out the currently projected budget surplus in 2029-30 “to almost zero.”

Also, this Spring Statement has come out before the Spending Review, which is expected to be in June.

This sets spending plans for a minimum three years of the five-year forecast period for all government departments. This review will set out the scale of public spending, which totals around £1.27 trillion. For context, gross national product in cash terms was £2.8 trillion in 2024.

So, there’s uncertainty around a sizeable chunk of the economy.

According to the Chancellor’s fiscal rule known as the stability rule, day-to-day spending must balance, so any shortfall against tax receipts will mean spending cuts or tax rises over the course of the Parliament. Both the potential tariffs imposed by the United States and the outcome of the Spending Review could have a significant impact on the economy, which means that it may not be until the autumn Budget that we get a better sense of the UK’s fiscal policy.

This is the Chancellor’s preference. Rachel Reeves is not the first Chancellor to want just one fiscal event per year. It is arguably better for businesses and households to have one set of tax or spending changes each year. The counter-argument is that particularly during times of uncertainty, perhaps an update more than once a year is useful. Other supranational bodies, such as the International Monetary Fund (IMF), produce economic forecasts roughly on a quarterly basis, which includes updating its view of the UK’s GDP growth. The Bank of England issues a quarterly report on its views of inflation and the economy as another example.

Indeed, the OBR is mandated to produce two economic forecasts annually. But, because of the stability rule, when the OBR significantly downgrades GDP growth, the rule is no longer met. As such, the Spring Statement is a response that’s required in order to show how the Chancellor intends to meet the fiscal rule.

Given the significant amount of uncertainty, a rather brief statement by the Chancellor was not unexpected. But, even a brief statement has changed government spending ahead of the comprehensive review of public spending due in a few months’ time.

There have been calls for the Chancellor to relax her fiscal rules. She has not altered the stability rule, but did introduce an investment rule which separates capital from current spending. It means that she does not need to significantly adjust taxes or public spending in order to pay for infrastructure or capital aspects of defence so long as public sector debt declines as a share of GDP by 2029-30.

This longer-term approach to public spending is indeed one of the rationales for government borrowing. Instead of raising taxes in one year to pay for a large infrastructure project, the government can borrow and spread the repayment, and therefore the impact on taxpayers, over a number of years. So, instead of a big jump in taxes in one year, which is not ideal, government borrowing can enable the smoother application of fiscal policy.

But, the stability rule that requires current spending to be balanced has seemingly led to more volatility in fiscal policy. The current environment is highly uncertain, which compounds this volatility. The Chancellor has set this fiscal rule to give bond markets, and thus the UK’s creditors, a sense of stability about how public spending is financed in a more transparent way. The result, though, is more frequent changes to fiscal policy that impacts firms and households in the economy.

Greater uncertainty can lead firms to hold off investing and households to refrain from spending. In surveys of companies, they regularly cite uncertainty as a reason for not investing. That uncertainty can be due to frequent policy or regulatory changes, or a more volatile macroeconomic environment on account of geo-politics or other risks. Households holding off from spending would compound a firm’s reluctance to expand and hire if demand looks weaker.

Therefore, a more stable credit environment is a necessary but not necessarily sufficient condition for firm investment. Companies are also affected by changing tax and spending policies. A key reason for the UK’s slow economic growth is its lagging investment relative to other major economies. Today’s Spring Statement shows how hard it is to achieve both stability and economic growth, which are both pillars of the government’s fiscal policy when the world is as uncertain as it is.

Linda Yueh is Adjunct Professor of Economics at the London Business School; Fellow in Economics at St Edmund Hall, Oxford University; and the author of The Great Crashes: Lessons from Global Meltdowns and How to Prevent Them and The Great Economists: How Their Ideas Can Help Us Today.