Stephen Lynch, a regular contributor to Financial Accountant, gives an update on the Spring Statement.
Chancellor Rachel Reeves gives positive update, but global uncertainty and higher taxes weigh heavy, writes Stephen Lynch.
The chancellor’s Spring Statement has detailed contrasting estimates for growth, inflation, unemployment, government spending and tax income.
Economic growth forecasts have been downgraded for this year, as the government defended its approach to boosting GDP and cutting the cost of living.
Chancellor of the Exchequer Rachel Reeves suggested that public sector net borrowing and inflation is falling faster than the last forecast.
However, the Office for Budget Responsibility’s (OBR) new forecasts also showed that the economy would grow more slowly than projected in the autumn (1.1%, down from 1.4%).
Reeves said that decisions already taken meant “a stronger and more secure economy. Inflation and interest rates falling. And in every part of Britain, working people are better off”.
The chancellor announced that the government’s fiscal headroom - its buffer in the case of economic shocks - had risen to £23.6bn from £21.7bn.
Responding to what he called a "surrender statement”, the Conservative shadow chancellor Sir Mel Stride said Reeves knew government borrowing is nearly double what was forecast at the time of the general election.
Reform UK’s Treasury spokesman Robert Jenrick called for relief for hard-working people with higher bills, including cuts to fuel duty.
The Greens also called for bolder action on bills and rent and for Reeves to scrap her “dysfunctional" fiscal rules.
The weight of a heavier tax burden
At the despatch box, Reeves said that real wages had risen, adding that by the next election “people will be over £1,000 a year better off after accounting for inflation”.
But the OBR’s forecasts predict a record post-war ‘tax burden’ of 38% of GDP in 2030/31.
The public finance watchdog said that a higher level of this tax take risks the tax system’s incentives distorting or constraining economy activity “by more than expected”. The OBR also warned of other risks and uncertainties around their forecasts, including “pressures on spending in areas such as defence, education, welfare, and, over the longer term, from an ageing population”.
Commenting on the statement’s impact on business confidence, Anisha Chawla, client tax manager at Menzies, said: “Recent increases in National Insurance contributions and an inflated tax burden have placed significant strain on Britain’s businesses, especially smaller firms.
“Without a clear and consistent growth strategy, confidence will remain fragile, and investment and planning will continue to stall.”
The Federation of Small Businesses (FSB) also warned about the April “cost crunch” facing the UK’s 5.7 million small businesses and self-employed. FSB Policy Chair Tina McKenzie called on Reeves to reassure SMEs she would “take decisive action to ease the taxes and costs imperilling small firms and the self-employed, and in turn imperilling the jobs, opportunities and local prosperity they could otherwise bring”.
Unemployment to rise amid global geopolitical uncertainty
The OBR’s changed forecast for unemployment now expects a ten-year peak of 5.3% by the middle of this year – before falling to 4.1% by 2030.
In its updated forecasts, the OBR also said the weak jobs market was mainly caused by entrants “struggling to find work amid subdued hiring demand”.
During her speech, the chancellor highlighted how GDP per person (per capita) growth was set to grow more than expected in autumn (5.6% over the course of Parliament).
The OBR explicitly stated the potential economic impacts of the Employment Rights Act are not included in their forecast, because they judge the outcome is still too uncertain before details are confirmed in secondary legislation.
Susannah Streeter, chief investment strategist, Wealth Club, also reiterated the OBR’s warning, saying that any wiggle room identified in this statement “also risks being swallowed up by the economic repercussions of war in the Middle East”.