In two weeks time the Spring Statement (now rebranded as the Spring Forecast by Rachel Reeves and the Labour Government to emphasise its role as an economic forecast rather than a fiscal event) is set to take place on March 26th.
Mounting fiscal pressures, moderating growth, and persistent inflation are things that Chancellor Rachel Reeves will have to tackle in the midst of this challenging economic landscape. Reeves will likely blend subtle tax reforms with targeted spending cuts—all in her second crack at eroding the government's financial black hole.
The Spring Forecast's main role is to lay out the economic outlook and projections from the Office for Budget Responsibility (OBR) and the Bank of England. Estimates state the UK economy might grow by around 1.6 percent this year, which is a modest pickup from previous forecasts but still below historical averages.
Our public finances show borrowing for the 2024–25 tax year forecast to reach around £143 billion and this is £16 billion over earlier predictions. Reeves will be compelled to make difficult decisions to balance revenue generation for the Treasury with political promises to, among others, not raise taxes.
Taking this into account we could be seeing things like further tax threshold freezes, adjustments to benefits, and spending cuts.
Explicit tax hikes have been avoided in order to remain true to Labour’s manifesto promises of not raising taxes on working people, so the government is likely to employ "stealth tax" policies instead. This has worked for the previous government with the cornerstone being the income tax threshold freeze.
During the pandemic the threshold freezes were brought in temporarily but the rampant inflation post-pandemic really amplified the 'fiscal drag' effect they create, as the freeze prevents the adjustment of tax brackets to keep pace with inflation-driven wage growth. By extending the freeze until 2030, the government can gradually draw more income into higher tax brackets.
For example, someone earning around £39,000 a year could see an increase in annual tax liabilities by over £800. This is based on the difference between the amount of tax paid if threshold did rise with inflation versus the thresholds remaining frozen. If the threshold continues remains static, contributing to what fiscal estimates suggest could yield up to an extra £10.1 billion annually by 2029–30.
Another proposal under frequent discussion is the reform of cash ISAs. The idea is to reduce the annual tax-free savings limit from £20,000 to a significantly lower amount, mooted to be £4,000. Those in favour of the rumoured changes say savers will be pushed towards investments that might spur economic growth, whereas critics point out that the expected additional revenue of just £200 million falls short of what is needed and for the high price of public backlash.
Corporation tax and VAT are not the main targets of the Spring Forecast, but minor adjustments might be introduced to spur business investment.
The government is looking at efficiency savings and targeted reductions in public spending as a means to rein in the deficit. A significant part of the spending cuts is expected to come from reforms in the benefits system.
The freeze on Personal Independence Payments (PIP) is seen as one of the more controversial measures. PIP is designed to assist those with disabilities in meeting additional living costs, and freezing these payments means that recipients will not receive adjustments for inflation. This measure could provide savings of approximately £5 billion but will affect about 4 million beneficiaries, many of whom fall within low to middle income brackets. Modifications including tougher eligibility criteria for PIP, are also under consideration, which could further erode support among vulnerable sections of society.
Changes to unemployment benefits are possible. The government is shifting from the binary thinking of "working or not working" to a system that incentivises employment through proactive reassessment. In the new framework, people actively seeking employment would see an increase in their benefits, while those deemed unfit to work could see reductions to the financial help they receive. While the strategy makes sense on paper, it risks deepening financial hardship for those already struggling.
Increase commitments to spending on defence recently will likely be offset by efficiency gains elsewhere in the public spending framework.
Inflation remains the elephant in the room as even with targeted interventions, inflation is forecast to average 3.5 percent this year, significantly above the Bank of England’s target of 2% though they have reduced interest rates. Rising prices in essentials like energy and groceries continue to pressure household budgets.
Unemployment is expected to settle at around 4.2 percent this year, a sign of an overall resilient job market but subdued pay growth could dampen consumer confidence and reduce spending over the longer term, dampening economic growth.
With borrowing levels surging and the need to return to a surplus by the end of the decade, the Chancellor’s decision-making at the Spring Forecast will be an important watch.
What will happen to Labour’s commitment to not explicitly raise taxes on working people when they are firmly stuck to the need to balance the books?