Client Update - 28th March 2025

Wednesday’s spring statement gave Rachel Reeves an opportunity to convince us that she has put the UK public finances on a stable footing, but the government’s fiscal watchdog made clear how easily she could get knocked off balance once more. The £14bn fiscal repair job the chancellor undertook was never meant to happen in the first place as she had committed to only one fiscal event a year. Even allowing for yesterday’s cuts to spending, the forecasts from the Office for Budget Responsibility (OBR) show Reeves remains in perilous fiscal waters.

The chancellor set out how she aimed to rebuild ‘fiscal headroom’ after, in her words, rising government borrowing costs and anaemic economic growth badly damaged the finances. Reeves said the mix of cuts in welfare benefits and departmental spending and the indirect effect of higher tax receipts will reduce the government’s total outlays by £14 billion by fiscal year 2029/30. That will in turn replenish the so-called headroom to £9.9 billion. The statement was accompanied by news the OBR, the UK’s fiscal watchdog, had sliced its 2025 economic growth projection in half to 1.0%, although it has increased growth forecasts for subsequent years. The £9.9bn margin of error against her “non-negotiable” fiscal rule requiring her to balance the current budget by 2029-30 is the third-slimmest room for error since 2010.

“The array of potential claims on that small amount of headroom is large and varied,” warned OBR chair Richard Hughes, giving Reeves no more than a 50% chance of meeting her targets. “The risks to the outlook for UK productivity, interest rates and global tariffs could all reduce it back to zero.” Imagine if there was also a US President hell bent on creating tariffs for global exports into America that would make this exact risk a reality.

As a reminder, last year she vowed to only hold one major fiscal event each year, but she left in place a requirement for the OBR to deliver forecasts in both the spring and autumn. I think this could have been a mistake. Higher than expected borrowing figures and rising debt interest costs pulled the Treasury into a £4.1bn shortfall against the key current budget rule based on the OBR’s new forecast and forced Reeves into action.

Reeves has sought to right the ship with a combination of (not very Labour) welfare cuts, a tax-avoidance crackdown, and a squeeze on day-to-day departmental spending. This may balance her books now, but underlying public sector net debt is projected to carry on rising until the end of the parliament despite the spending cuts, reaching 95% of GDP in 2029-30, compared with 89% currently according to the OBR. That comes even as the tax take is set to rise to a postwar high at 37.7% of GDP in 2027-28, the OBR said.

They did assume that GDP growth will rebound later in the parliament, helped by favourable estimates of the impact of Labour’s planning reforms. Reeves fairly seized upon that predicted recovery on Wednesday, but as with many of the other assumptions underpinning the UK’s fiscal outlook, economists warned it could quickly dissolve on contact with harsh economic reality (hello President Trump).

This was echoed as the OBR suggested that if the US extended its 20% tariff increase to all goods imports, the hit to growth and increase in inflation-linked government spending would “virtually eliminate” headroom against the current budget rule by 2029-30.

The OBR also said “huge uncertainty” around the effects of welfare reforms, and the fact that the government had not yet said how it would fund its ambition to raise defence spending to 3% of GDP, compounded the risks to the fiscal outlook.

Throughout her statement, Rachel Reeves referred to the changing global economy, but it does not seem that actually much has changed in her policy, apart from some tinkering on the edges. If the global landscape has changed so much in the last six months, can her policies not be adapted to change with it?

It is time again for “you know who.” I have as much desire to keep mentioning the US President as Wizards have muttering the word Voldemort, however no sooner had we started digesting the Chancellor’s statement, than Trump was up to his tariff tricks again. This time he was announcing 25% tariffs on foreign-made cars. He stated that the new tariff will go into effect from April 2nd 2025, the US president’s self-imposed deadline for unveiling numerous reciprocal duties against US trade partners – his self-titled “Liberation Day”. They will apply to completed vehicles and foreign car parts, including engines, transmissions, power-train parts, and electrical components. Asked if there was anything carmakers could do to have the tariffs removed, Trump replied: “This is permanent, 100 per cent.”

Almost half of vehicles sold in the US are imported and cars assembled in the US contain nearly 60 per cent foreign-sourced parts. Last year Canada shipped more than $35bn worth of cars to the US alone. If it does indeed come about, this would be painful.

Whilst Wednesday’s statement from Rachel Reeves will have caused barely a ripple to the global economy, Trumps tariff announcements on the 2nd April have the potential to cause rather more of a disturbance. An interesting update awaits us next Friday, I am sure. Do have a good weekend.