Spring Statement March 2025

The Chancellor of the Exchequer, Rachel Reeves, has delivered her first Spring Statement to the House of Commons and presented the Office for Budget Responsibility’s (OBR) latest forecasts. Reeves has committed to holding just one main fiscal event each year (a budget in the autumn) so she had hoped that this would be a low-key affair with few if any policy announcements.

The day started with some unexpected but welcome news with official figures showing that UK inflation has eased more than expected. The rate of the Consumer Price Index (CPI) inflation fell to 2.8% in February from 3% in January, the Office for National Statistics (ONS) said. The cost of living is still rising for households across the UK with inflation remaining above the Bank of England’s 2% target (economists had forecast that CPI inflation would come in at 2.9% for February).

The Chancellor said that the economic environment has changed since her autumn budget (October 30th 2024) with global uncertainty increasing government borrowing costs and weakening growth prospects. The Institute for Government provided analysis in advance and in response to the statement, assessing how the OBR’s forecast has changed, how that affects the government’s adherence to its fiscal rules, how it has chosen to respond and what this all means for June’s multi-year spending review.

The Spring Statement outlined measures aimed at addressing the UK’s fiscal challenges and stimulating economic growth. Key announcements included:

Economic Growth and Inflation Projections

• The OBR forecasts UK economic growth at 1% for 2025, improving to 1.9% by 2026. 
• Inflation is projected to peak at 3.2% in mid-2025, with a decrease to 2.1% by 2026 and to 2% in 2027.. 

Welfare Reforms and Spending Cuts

• A £3.4 billion reduction in welfare spending by 2029/30, primarily through stricter eligibility criteria for Personal Independence Payments (PIP) starting November 2026. 
• Universal Credit’s standard allowance will increase from £92 per week in 2025/26 to £106 per week by 2029/30, accompanied by a 50% reduction and subsequent freeze of the health element for new claimants.
• Implementation of a stricter eligibility test for PIP claims from November 2026. 

Defence and Capital Investments

• An additional £2.2 billion allocated to defence spending from April 2025, focusing on advanced military technologies and defence infrastructure. 
• Capital spending will increase by £2 billion annually, with a £3.25 billion transformation fund to reform civil service staffing. 

Public Sector Spending and Tax Measures

• Departmental spending growth is capped at 1.2%, resulting in a £6.1 billion reduction in day-to-day spending by 2029/30 compared to previous plans. 
• No changes to taxation or increased borrowing. Efforts to combat tax avoidance aim to generate an additional £1 billion annually. 

Housing and Infrastructure

• Reforms to planning rules are projected to contribute £6.8 billion to the economy and facilitate the construction of over 1.3 million homes within five years - which is short of the government’s 1.5 million target.

The Chancellor has said that these measures reflect the government’s strategy to balance fiscal responsibility with initiatives designed to support economic growth and public services.