Reeves Prioritises Fiscal Rules and Political Credibility in Spring Statement, Say Economists

Chancellor Rachel Reeves announced further cuts to welfare benefits and government departments, after it emerged existing reforms would save less than planned.

Chancellor of the Exchequer Rachel Reeves leaving 11 Downing Street in London on March 26, 2025. PA

Chancellor Rachel Reeves has prioritised fiscal discipline and political credibility over a blueprint for growth in her Spring Statement, economists have suggested.

Confronted with downgraded growth forecasts and a tightening fiscal environment, Reeves has unveiled a £14 billion package of cuts and savings in a fiscal update on Wednesday. Reeves told MPs the decisions were necessary to comply with the UK’s “non-negotiable” fiscal rules amid “increased global uncertainty.”

Her fiscal rules, rooted in Labour’s election promises, prohibit further tax increases and preclude a return to austerity for public services.

The £14 billion fiscal adjustment is designed restore Reeves’s headroom against her debt target to £9.9 billion by 2029/30 after the Office for Budget Responsibility (OBR) forecast she would miss it by £4.1 billion without taking action.

Economists at Capital Economics described the adjustment as “fiscal tinkering.”

“All Reeves did was restore the buffer she had back in October against the fiscal rules of close to £10 billion, which we know have been more than wiped out,” said Paul Dales, chief economist at Capital Economics.

Paul Johnson, director of the Institute for Fiscal Studies, said the Spring Statement amounted to the “smallest fiscal event Rachel Reeves could have managed in the context of her fiscal rules and the minor forecast downgrade presented to her by the OBR.”

He argued that “iron-clad” fiscal rules leave the government “next to no headroom” and “at mercy of events.”

Changes to welfare policies will see the standard allowance for universal credit, which had been set to rise to £107 per week by 2030, instead increase to £106. Disability benefit assessments will become stricter from late 2026, with Personal Independence Payments subject to a more rigorous eligibility test.

“Knocking a pound a week off the main rate of universal credit in order, it seems, to return the fiscal headroom to exactly where it was last October, really does risk undermining the idea that benefit reform, which is much needed, is being made for any reason other than chasing a fiscal number,” said Johnson.

Growing Pressures, Shrinking Choices

The backdrop to Wednesday’s statement is one of intensifying economic headwinds.

Global interest rates remain elevated, geopolitical risks are mounting, and the UK has pledged to raise defence spending from 2.5 to 3 percent of GDP by the early 2030s.

With the UK’s debt-to-GDP ratio approaching 100 percent, Reeves has little space to borrow without risking a rise in debt servicing costs. Yet she also announced confirmed an increase in defence spending.

Originally due to rise by £2.9 billion next year, military spending will now increase by an additional £2.2 billion. The Treasury said this will raise defence expenditure to 2.36 percent of national income in 2026, calling it a “down payment” towards a planned rise to 2.5 percent by 2027.

Dales argued that the non-defence spending can only be cut so far and if Reeves tries to fund more defence spending by borrowing in future, she may test the tolerance of investors.

“The government is in a tight situation, but it has limited its options. At some point they’re just going to have to give themselves more options here.

“The big picture thing, really, is that, by and large, I think the fiscal rules are there for political credibility to help the public, but the real restraint is the financial markets,” said Dales.

Deferred Decisions

In the short term, economists expect the Spring Statement to have a limited effect on growth or interest rates. The fiscal tightening, equivalent to 0.3 percent of GDP, mostly takes effect from 2027, meaning 2025 growth is still projected at a modest 0.8 percent.

However, the slightly tighter stance could eventually give the Bank of England more room to ease monetary policy if inflation allows. Forecasters expect interest rates could fall to around 3.5 percent by 2026, though the pace of rate cuts remains uncertain.

Reeves’s Spring Statement may be remembered less for what it achieved and more for what it deferred. With a full Spending Review due in June and a potentially pivotal Autumn Budget to follow, Wednesday’s announcement was more a prelude than a pivot.

“Overall, this was a holding exercise ahead of the really significant decisions later in the year. The June Spending Review will be where the Chancellor’s tighter spending plans crystallise into specific choices and start bumping up against reality, and against her cabinet colleagues,” said Johnson.

“And the Autumn Budget? Even small downgrades to the OBR’s forecasts could mean more action is needed to fill a fiscal hole. And given global risks and shoddy UK data, a bigger downgrade is entirely possible,” he said.

He expects the next several months to highlight the uncertainty around the government’s future decisions on taxation.

“There is a cost, both economic and political, to that uncertainty. The government will suffer the political cost. We will suffer the economic cost,” said Johnson.