Spring Statement 2025: OBR slashes growth forecast
The Office for Budget Responsibility (OBR) has slashed its growth forecast in half to one per cent as Chancellor Rachel Reeves said she was “not happy” about the revised figures.
Reeves has insisted that high growth is key to Labour’s mission in government, while Prime Minister Keir Starmer has previously suggested that it is aiming for a rate of 2.5 per cent.
However, the latest OBR verdict on the UK economy undercuts the government’s ambitions, suggesting that it is unlikely to achieve its targets.
In some positive news for Reeves, the OBR also said the UK economy would grow at a higher rate than it had previously predicted in the years between 2026 and 20230.
Reeves said the government’s commitment to “tearing down regulatory barriers” and backing of major infrastructure projects such as a third runway at Heathrow represented a “serious plan” for growth.
Separately, the OBR upgraded its inflation forecast to a peak of 3.2 per cent for the year.
The figure is lower than the Bank of England’s prediction that it will reach as high as 3.75 per cent.
Reeves said she had restored headroom worth £9.9bn after higher borrowing brought by a “period of heightened uncertainty” wiped it out.
This headroom was restored after public spending cuts were made to welfare.
City analysts said ahead of the Spring Statement that her previous headroom worth around £9.9bn had been wiped out as a result of sluggish growth and high debt repayments.
Her ironclad fiscal rules – to reduce net public debt and deliver a current balance in five years – have subsequently forced her to seek savings.
Leading City firms have reacted to Reeves’ Spring Statement with some caution.
Lindsay James, an investment strategist at Quilter, said Reeves’ fiscal headroom remained “miniscule”.
“Labour has perhaps learned its lesson that the economy requires a more positive tone from government, and that the burden placed upon businesses at the Budget was enough for now,” she said. “How long this can last remains to be seen.”
Shamil Gohil, fixed income portfolio manager at investment firm Fidelity International, said Reeves’ headroom was “arguably not enough” given uncertainties.
“The historical average has been closer to £30bn but recent governments have run it tighter,” he said. “A £20bn number would have been more constructive for Gilts. Ultimately, the fiscal headroom is how the market quantifies and judges the Chancellor’s credibility.”
In an eleventh hour effort to meet the rules, it was revealed that the Chancellor was making further benefit cuts worth £500m as the OBR said initial savings to welfare would save less than it had planned.
In its new report, the watchdog appeared to take issue with Reeves’ delays in informing the OBR of her plans.
“Policy costings information on the direct fiscal effects of some measures was received late and without sufficient detail,” the report said.
“In addition, relatively small changes were made to the policy parameters of two welfare
measures following the costings certification deadline. As a result, we have not been able
to certify these costings but have used the Government’s estimates in this forecast and will
return to them in our next forecast.”
The welfare cuts have increased tensions within the Labour Party as some ministers have reportedly spoken out against the cuts in meetings.
The government is also making cuts to jobs in the civil service, skimming 15 per cent of its running costs.
The cuts announced will amount to more than £2bn by 2030, ministers said.
Free market think tank Adam Smith Institute director Maxwell Marlow said Reeves should have gone further and made deeper cuts.
“We can no longer tolerate the state’s gluttony,” Marlow said. “The Chancellor must cut anti-growth and anti-business taxes, such as National Insurance or Capital Gains Tax, and she must scrap more QUANGOs as a matter of urgency.”