Rachel Reeves delivered her Spring Statement amid a gloomy economic backdrop. The political framing was familiar: tough choices now to deliver long-term change and national security in an increasingly uncertain world.
Through some significant, but pre-announced spending cuts, Reeves stayed within her fiscal rules, and after a commanding performance in the Chamber today, our view is that the Chancellor largely succeeded in keeping her economic strategy and political credibility intact.
Economic outlook
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Growth downgraded: The OBR has revised the UK's GDP growth forecast for 2025 downward, halving the previous estimate from 2% to 1%. This adjustment reflects global uncertainties, low productivity and high borrowing costs. The longer-term picture was more positive, with growth projections for subsequent years revised upwards. 2026: 1.9% (+0.1 on previous forecast); 2027: 1.8% (+0.3); 2028: 1.7% (+0.2); 2029: 1.8% (+0.2). A significant driver of this is the government’s planning reforms.
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Inflation will be up this year, but will fall: Forecast inflation (CPI) was adjusted up from 2.6% to 3.2% for 2025. This is driven by higher energy, water and food prices, and wage growth. Inflation is then projected to average 2.1% in 2026, and 2% in 2027.
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Fiscal headroom protected: Higher debt payments and weaker tax receipts removed the fiscal headroom announced in the last budget, but the Chancellor has successfully addressed this, using welfare reforms, departmental spending cuts, and the positive projected impact of its planning reforms to offset this deterioration and restore headroom to a similar level expected at the last budget.
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Government spending projections reduced: Overall, projected annual government spending will be reduced by £6.1bn by 2029-30 and it will now grow by an average of 1.2% a year above inflation, compared to 1.3% in the Autumn.
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Borrowing costs higher, but will fall: Expected borrowing costs have been forecast up by an average of 0.25pts. The Bank Rate is now expected to fall from the current 4.5% to 3.8% by mid-2026.
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Unemployment rising: Unemployment will peak at 4.5% this year, driven by weaker growth and the impact of employer NICs, before falling to 4.1% by 2028.
- Risks identified: The primary risks to the fiscal forecast identified by the OBR are productivity increases not materialising, increases to borrowing costs, and the threat of US tariffs.
Key announcements
Public Sector efficiencies and reform:
The Chancellor announced a new £3.25bn Transformation Fund to support leaner and more effective public services.
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The first allocations include: £25m for the fostering system, £8m for new technology for Ministry of Justice probation schemes, £42m for three pioneering DSIT-led Frontier AI Exemplars, and £150m for government employee exit schemes.
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The Government is taking further action to create an agile and productive state by cutting regulatory compliance costs to businesses by 25%, embracing AI – with a commitment that 1 in 10 civil servants will be digital professionals by 2030 – and avoiding regulatory duplication by abolishing NHS England and the PSR.
- Reeves said that Government departments will reduce their administrative budgets by 15% by the end of the decade, and that savings on ‘back-office’ functions will total £2.2bn in 2029-30.
Welfare cut:
The Chancellor confirmed “final adjustments” to welfare cuts, following the OBR’s assessment that the Government’s original plans would save less than projected.
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Reeves has confirmed that in order to address the imbalance between promoting work and protecting those who will never be able to, the government will increase the Universal Credit standard allowance for new and existing claims above inflation from 2026-27; and that UC health elements will be frozen for existing claimants until 2029-30, and for new claims, the UC health element will be reduced to £50 a week in 2026-28 and then frozen until 2029-30.
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There will be a fundamental review of the Personal Independence Payment Assessment.
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The government will crack down on fraud and error in the welfare system by investing to recruit over 500 fraud and error staff, saving £240m in 2029-30.
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A £1bn package has been confirmed to help disabled and long-term sick people back into work.
- Welfare spending will fall between 2026 and the end of the forecast period.
Defence spending increased:
The Chancellor announced a £2.2bn increase in defence spending, aiming to meet Britain’s new target of 2.5% of GDP by 2027 (up from 2.3%)
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To fund this, international aid has been cut by £6bn, marking the largest sustained rise in defence spending since the Cold War.
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The plan also includes a £400m protected budget for the UK Defence Innovation (UKDI) from next month, to simplify and consolidate current MOD structures, spending at least 10% for new technologies and advanced manufacturing.
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The Ministry of Defence will also introduce significant procurement reforms, including a new segmented approach to acquisitions that speeds up the process for major platforms, modular upgrades, and rapid commercial exploitation, enabling quicker integration of advanced technologies into the military. This procurement overhaul aims to improve efficiency, reduce costs, and support a more agile defence sector.
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Portsmouth Naval Base will be ‘upgraded’ and homes for military families will be refurbished.
- Additionally, £2bn will be allocated to UK Export Finance’s Direct Lending capacity for defence exports.
Analysis
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Not a budget: Reeves’ preference was to revert to a single fiscal event each year, with the Spring Statement maintained as a simple economic update. That’s easier said than done, especially in the context of slower than promised growth and volatile global headwinds. But with much of the meat of this statement pre-announced, the Chancellor broadly kept to this strategy, with policy change largely implemented to maintain the fiscal balance projected in the Autumn Budget.
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The Chancellor’s fiscal rules are “non-negotiable”: While global headwinds could have been leveraged to change approach today, Reeves chose to prioritise her fiscal rules: a balanced budget and reducing debt as a percentage of GDP by 2029/30. The primacy of the rules is reflected in the tough welfare cuts announced.
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Growth Strategy: Reeves is pursuing a three pillared economic strategy of stability, investment and reform. The fiscal rules sit at the heart of the Stability Pillar and are therefore essential to her credibility. The Investment Pillar means cuts had to fall elsewhere and today we saw capital investment extended (largely for defence spending). On Reform, there was limited new content today (beyond the Transformation Fund), but planning, welfare and regulatory changes all played a critical role.
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Miscalculation of risk: Beyond an attempt to pin low growth on the Chancellor, the primary attack on Reeves that might stick is that she miscalculated economic risks that were arguably foreseeable. Given the political pain that welfare and departmental cuts will bring, this could become a vulnerability. However, a self-assured performance in the Chamber today will have helped Reeves manage this pressure in her own party.
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Spending review: Today’s statement provides some important framing for June’s Comprehensive Spending Review, which will confirm departmental budgets for 2026/7-2028/9. The key message today was that departments will be expected to innovate to become more efficient, productive and user focused.
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Look ahead to October’s budget: Given the likelihood of some, if not all the fiscal risks materialising, it is likely that there will be increased pressure for tax increases (e.g. on inheritance, capital gains, or maintaining frozen income tax thresholds) at the next budget.
- Opposition view: Conservatives are already hammering Labour’s economic weakness, broken promises, and the toll it’s taking on families across the country. They’ll argue Labour’s policies worsen Britain’s future, leaving it vulnerable with higher taxes and even more strained services: the forecast for growth is down, borrowing costs are up, inflation is up, and business confidence has been smashed. Repeating this message, they hope, will resonate in the long-term. Reeves’ cornered position - balancing cuts, rules, and pledges - underscores their critique: if productivity does not recover or US tariffs are introduced, the economy will take a significant hit, and Labour’s strategy will increasingly falter under scrutiny, potentially setting the stage for a nasty electoral fallout.
If you would like to get in touch with the MHP team, please contact Head of Public Affairs, Tim Snowball, at tim.snowball@mhpgroup.com