Spending, scrutiny, and strategy: Inside Reeves’ Spring Statement

"The threat facing our continent was transformed when Putin invaded Ukraine… At the same time, the global economy has become uncertain, bringing insecurity at home as trading patterns become more unstable and borrowing costs rise for many major economies.”

These are not the words of the former leader of the Conservative Party and former Prime Minister, Rishi Sunak, but those of the Chancellor of the Exchequer, Rachel Reeves, as she delivered the Spring Statement yesterday. Her words demonstrate a shift in the narrative to attribute responsibility to external factors for the difficult decisions – or £14 billion of savings – outlined in the statement. 

The speech was prompted by a new Office for Budget Responsibility (OBR) forecast downgrading UK growth expectations from 2% to 1% this year. Similarly gloomy was the forecast for inflation, which showed that the Bank of England’s target of 2% would not be met until 2027. 

Framing the government’s policies as part of ‘a changing world’, one name was conspicuously absent from the speech: US President Donald Trump. In a move that has become synonymous with his premiership, President Trump announced a 25% tariff on all motor imports to the US yesterday. By volume, cars are the most significant goods exported to the US, at over £6.4 billion in 2023, with British manufacturers Rolls Royce, Jaguar Land Rover and Aston Martin adversely affected. While the UK is not as dependent on motor exports as other European economies, the US is the largest export market for British vehicles. 

As the OBR have outlined, a scenario in which the UK and other nations retaliated to the imposition of tariffs would wipe out the government’s fiscal headroom and could reduce GDP growth to as low as 0.4% this year. Framed in this context, the measures outlined seem to be tactical changes to meet the government’s self-imposed fiscal rules rather than part of a broader strategic move to meet Labour’s growth ambitions.

The government is still betting on the fact that it will be able to negotiate some sort of exemption from US tariffs and thus continue to refrain from directly criticising the US administration. In response to the announcement, the Chancellor restated that the government would not impose retaliatory tariffs. She said, “We’re not at the moment in a position where we want to do anything to escalate these trade wars.”  

In this ‘uncertain world, ’ the Chancellor also restated the commitment to defence spending reaching 2.5% from April 2027with an injection of £6.4 billion, utilising savings from the foreign aid budget, which is being cut to 0.3% of GDP. 

The most controversial measure was the welfare reforms, which saw £4.8 billion in savings to the welfare budget. On the horizon is the threat of a significant rebellion from Labour MPs. The Mirror and Guardian both splashed with the headline “Balancing the books on the backs/at the expense of the poor”. The Resolution Foundation analysis backed up this interpretation, releasing figures which show that poorer families will lose £500 per year by the end of the decade. This is a particular blow as one of Reeves’ junior HMT Ministers, Torsten Bell, was the CEO of the Resolution Foundation until becoming an MP last year. Chief Secretary to the Treasury Darren Jones caused significant backlash by likening disability benefit cuts to “pocket money”. 

To sweeten the pill for her MPs, the Chancellor restated Labour’s commitment to ‘backing the builders and not the blockers’ with a £2 billion investment in social and affordable housing and £600 million invested in upskilling the construction industry. Alongside a new £3.25 billion Transformation Fund to support public services reform and bring down the cost of running government. The OBR recognised that changes to planning reforms would add 0.2% to GDP.   

Yet, with the Chancellor doubling down on her ‘non-negotiable’ fiscal rules even before the enhanced costs of the previous budget are passed onto businesses, the likelihood of her having to either cut public finances or raise taxes when she delivers the Budget later this year already feels inevitable.

If you would like to read a sector specific breakdown of the Spring Statement, please follow this link