Spring Statement 2025: Some observations

Not surprisingly, economic commentary following the spring statement on Wednesday has been universally downbeat. As I had anticipated, the Chancellor has had to juggle her fiscal plans as a direct result of the mistakes she and the government made back in the autumn with the budget. And, as a direct result of the slower growth seen since the mid-point of last year, the OBR has also halved its growth forecast for this year, albeit that it has increased its nominal GDP forecasts marginally over the forecast horizon, largely because of a 0.25% increase in the OBR’s medium-term growth forecast which now stands at 1.75%. The OBR’s inflation expectations are largely unchanged from October at 2% over the medium term, albeit that, like the MPC, it sees a spike in inflation this year to 3.8% in July and thereafter a gradual return to target.

Much attention has been paid to the so-called fiscal headroom in the Chancellor’s revised plans, which remains small in the context of overall spending and in light of the OBR’s spuriously precise guess that the headroom has a 46% chance of being insufficient.

The Chancellor has attempted to dodge any blame for the problems she now confronts by blaming a changed world environment and the default option so frequently embraced by politicians, her predecessors. The OBR doubles down on this argument by emphasising the potential damage that could be done to the economy by a particularly odd tariff assumption. In this respect, the OBR has assumed that the US imposes a 20% tariff on everything and that everyone retaliates with reciprocal tariffs, which then remain in place (no free trade agreements are assumed in this scenario), and this results in 1% off GDP.

Interestingly, this uncertainty, cited by Rachael Reeves, appears not to have affected the US economy, which some might argue should be the country most affected by it. This week, data was released showing that the economy expanded by 2.4% in the final quarter of last year, ahead of expectations.

Some of the most ridiculous commentary I have seen about the Spring Statement is that related to the debate about a return to austerity. Just in case anyone is in any doubt, the statement makes it clear that government spending will be £10bn higher than the Chancellor had predicted in October in the financial year 2025/26. And, in the current year, the deficit will be £137 billion, which is £10 billion higher than was forecast in the Autumn Budget. As a result of a slightly higher medium-term growth forecast, the deficit is still expected to track to 2% of GDP by 2029/30, which is broadly similar to the projections back in the Budget. So, in summary, this statement announced a further £10bn increase in government spending for next year on top of the £70bn increase announced in the Autumn. How this can be described as a return to austerity is beyond me.

I suppose this particular bit of ill-informed hysteria once again shines a light on the challenges we face as a nation. Any attempt, even by a labour government, to reign in the £1.3 trillion business that is the UK government is met with howls of protest from those who seem incapable of understanding that this parasitic beast is consuming its host. Unchecked, this story will end very badly, and that’s why grappling with this fundamental challenge requires radical thinking and a level of bravery in our politicians that is not yet evident on either side of the political divide.

One odd thing that I would not normally quibble with is the OBR’s guess that as a result of planning reform, more houses will be built in the UK over the forecast horizon, resulting in a boost to GDP. (see the higher forecast I mentioned earlier) In summary, the expectation is that because the government can execute compulsory land purchases, it will be able to buy land, deliver planning permission, and finance the houses that will be built on said land with the profits from the development uplift. The government’s expectation is that private sector developers will come forward to build these houses, and the government will finance the construction with profit from the development. In so doing, it is able to finance development without incurring additional borrowing, which all sounds splendid.

However, I would highlight some challenges, some of which the OBR has also expressed some doubts over. The first, of course, is that because some of these targeted developments will be on green belt land, there will be local opposition. Perhaps most importantly, tens of thousands of additional, qualified, and skilled construction workers will have to be found to deliver the projects in an industry that is already facing skills shortages and problems associated with an ageing workforce. The other reality not solved by these plans is that they fail to address the fundamental problems affecting mortgage availability in the UK. This is not just an issue with price (interest rates); it also concerns regulation, which impacts banks’ willingness to lend. For example, anyone who is self-employed will have found it virtually impossible to get a mortgage from the big six leading lenders in recent years.

As much as I would like to see an industry like this revitalised and contribute to the economy’s growth rate, I am very sceptical that the government can catalyse this level of increased production on the timescale it needs and in this way. Sadly, I do not see this target being remotely achieved.

My view is that as interest rates come down (more on this later), the demand for new housing will increase with better affordability, which will naturally lead to the private sector increasing the rate of new construction. In other words, the industry will recover naturally as a result of what will happen to interest rates and, subsequently, the mindset of the big lenders rather than as a result of this government policy change.

What has the OBR got wrong – again?

Unfortunately, for all of its sophistication and hundreds of pages of information, the OBR’s fundamental approach to forecasting the UK economy has once again been found wanting. On this occasion, I feel a bit sorry for the organisation because, for reasons outside of its control, within two days of the publication of its numbers, they are already out of date and wrong.

On Wednesday, in their updated economy and fiscal forecast document, the OBR stated that the UK economy grew by 0.9% in 2024. Two days later, the ONS announced in the National Accounts data published this morning that the economy grew by 1.1% in 2024. This difference does not just affect 2024’s numbers, but, of course, also means that the OBR’s 2025 forecast started in the wrong place and is therefore already wrong. This, in turn, means all of the OBR numbers need to be revisited within hours of all of the analysis commentary and conclusions that flowed from their two-day-old prognostications.

But it doesn’t end there, unfortunately. The OBR’s underlying numbers were already out of date before this latest embarrassment, and that’s because, given the OBR’s vastly complicated model, it has to lock down assumptions way before its updates are published. This is something that pretty much every commentator misses, but it is profoundly important. For example, its inflation forecast, which sees CPI reaching 3.8% in July, is based on gas prices that are 35% above where they are now.

The OBR’s government spending numbers are also based on much higher assumed ten-year gilt yields (and consequential higher assumed debt costs) over the forecast period than was assumed in the Autumn despite its lower medium-term inflation forecasts.

This rather odd conclusion is apparently driven by what happened in global bond markets weeks ago, since when, ten-year yields in the US have fallen significantly. For example, this is the yield graph of the ten-year treasury in recent months.

It is in this area of inflation and interest rates that I think the OBR’s numbers make the least sense. I am much more optimistic about near-term inflation because gas prices are lower, food prices are lower and rents have stopped increasing. I see short-term inflation picking up to about 3% in July, but not to the much higher rates anticipated by both the MPC and the OBR. Following this near-term spike in inflation, which the government has created in large part, I expect inflation to then fall back towards its target of 2% by the end of this year. In my opinion, this reduction in inflation will be followed by lower official interest rates and lower gilt yields over the medium term, not higher yields as the OBR forecasts.

I believe the OBR's thinking has a really important flaw. Fundamentally, the UK economy is not generating inflation. Based on what is already happening to key items in the inflation basket, including food, rents, and energy prices, I think that the OBR and MPC have got this critically important variable wrong.

I am very confident I am right on this inflation debate, and I was encouraged by the better-than-expected CPI data for February, which came in at 2.8%, not the 3% that many were expecting.

So, having stuck my neck out on inflation and interest rates, what about growth? I think the OBR are again excessively conservative, at least in the short term. This may not be surprising, given their negative expectations for inflation and market interest rates. My best guess is that the economy will deliver growth of between 1.25 and 1.5% this year, not the 1% the OBR now forecast. Some may think this is naively optimistic, but I would highlight in response that according to the latest ONS data published today, we now know that the UK economy delivered 1.5% growth in just the first half of last year, so it is more than capable of achieving the better outcome I expect, it just needs a bit of a helping hand from the MPC in the form of lower rates rather than a foot on its neck in the form of more tax increases.

Let me briefly explain why I believe this. In 2024, real disposable incomes grew by 4.25%, and yet real consumer spending was up by less than 1%, according to the ONS. This meant there was a savings boom; indeed, in the latest ONS data for Q4 2024, the household saving ratio ballooned to 12% from an already high 10.3% in Q3. This extraordinary savings boom reflects a combination of an erosion in consumer confidence in the second half of the year and the extremely attractive returns available to savers. Of course, this, in turn, is a product of high official interest rates, which are currently at 4.5%.

In my last blog piece, I wrote about this boom in saving in the UK and what has driven it. Looking through the rest of 2025, I suspect that as inflation comes in lower than expected, this will, in turn, catalyse the MPC to cut rates (in May, August and November) and that this will change household spending and saving behaviour and lead to much better consumption growth than is forecast. It is this that I believe will drive a better UK growth outcome this year and possibly next year. Ultimately, I see rates falling further than this and possibly by the midpoint of 2026 to below 3%. In summary, if the UK must reluctantly endure high and rising levels of taxation, which appears unavoidable at least until the end of the decade, this constraint on growth must be offset by much lower interest rates than we currently have. It is that simple.

Summary

1. The ink was barely dry on the OBR’s March 2025 Economic and fiscal outlook when the latest national accounts data published by the ONS rendered it out of date and wrong.
2. Both the OBR and MPC have got their near-term inflation expectations wrong. Inflation will peak at a much lower level in July and fall towards the target by the end of the year.
3. This will enable rates to fall relatively quickly through the remaining nine months of 2025.
4. Gilt yields will fall over the next 18 months, not rise as the OBR predicts.
5. Lower rates will catalyse a shift in saving and spending behaviour in the UK household sector. (Maybe today’s better-than-expected retail sales data is a good omen of this) This shift will lead to higher consumption growth and a better overall growth outcome.
6. This can be sustained into 2026 and beyond if the MPC continues to deliver monetary stimulus through even lower rates.
7. If I am right, maybe Rachael Reeves ends up being a bit luckier than she deserves to be and doesn’t end up in the sort of fiscal hole most commentators predict.