Originally published at: The Spring Statement – everything investors need to know – InvestEngine Insights
Rachel Reeves delivered her Spring Statement this afternoon.
The chancellor had been clear that this was not intended to be a full-blooded budget, reiterating that she was aiming for only one major fiscal event per year. Decisions on future tax rises will therefore wait until her autumn budget.
The Spring Statement
While there were no changes to the cash ISA limit in the Spring Statement, which had been rumoured, the Government confirmed it was still working on ways to reform tax-free ISA savings accounts.
The Office for Budget Responsibility (OBR) revised their growth forecast for the UK down from 2% to 1% in 2025. It did, however, also upgrade the GDP growth forecast for next year and every year thereafter (1.9% in 2026, 1.8% in 2027, 1.7% in 2028, and 1.8% in 2029).
Reeves’ main announcement was a £14 billion package of cuts, to restore her fiscal headroom of £9.9 billion by 2029-30, with a balanced budget by 2027-8.
To fund this, she announced cuts to welfare benefits, including personal independence payments (PIPs) and universal credit, which will save £4.8bn in the welfare budget. After accounting for a £1 billion job support programme and £400 million for job coaches, net welfare savings will be £3.4 billion.
Additional cuts to day-to-day departmental spending are expected to save £3.6bn by 2029-30. This equates to a 15% reduction in administrative costs, with about 10,000 civil service jobs expected to go.
A £3.25 billion “transformation fund” was announced, which will be used for funding “voluntary exit schemes” for civil service members.
Additionally, new measures to crack down on tax evasion will generate an extra £2.2bn in savings
Defense spending will rise to 2.5% of GDP next year, representing an increase of £2.2bn, while overseas aid will be reduced to 0.3% of GDP.
An additional £2bn will be allocated for investment spending.
An extra £2bn will be directed towards affordable housing.
How are markets reacting?
Sterling has weakened by approximately 0.3% from its peak this morning. However, the timing suggests that this was more of a reaction to the UK inflation figures released at 7 am, rather than the Spring Statement itself.
Source: Bloomberg. Past performance is not indicative of future results
Buoyed by a weaker sterling, which benefits the export-heavy FTSE 100, the UK market is in positive territory today, although only by around 0.25%. The market dipped slightly during the chancellor’s speech, but quickly rebounded in the half-hour following to reach its previous levels.
Source: Bloomberg. Past performance is not indicative of future results
2-year UK government bond yields fell by around 1% following the inflation figures, reflecting an increased likelihood of rate cuts. Although the yields spiked during the Chancellor’s speech, they quickly returned to near their opening levels.
Source: Bloomberg. Past performance is not indicative of future results
What was this morning’s inflation figure?
The UK’s inflation rate fell to 2.8% in February, down from 3% in January. This was below economists’ forecasts of 2.9%, and in line with the 2.8% forecast by the Bank of England.
Despite the dip, inflation is still expected to peak at around 3.7% later this year, above the Bank’s target of 2%, mainly driven by rising energy and utility prices.
Core inflation, which strips out the more volatile food and energy components, fell from 3.7% to 3.5%. Services inflation was unchanged at 5%.
The fall in headline CPI was almost entirely down to the fall in clothing prices, which experienced the largest drop in four years, from 2.1% in January to -0.7% in February.
The inflation figure is crucial for the UK government because rising inflation presents two main issues. Firstly, it increases the cost of benefits and pensions tied to inflation, which raises government spending. Secondly, it suggests that interest rates will remain high for a longer period, which in turn increases the cost of servicing the UK’s debt.
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