UK Spring Statement

The UK’s fiscal 'Spring Statement' is a big political talking point but its economic and financial implications are inconsequential. There may be some sectoral effects, but these will have been largely anticipated and priced-in long since (such as the widely-publicised extra defence spending from 2027/8). The statement will have no noticeable impact on the UK’s economic and financial performance. Global investment portfolios should remain as they are.

The bottom line – not easy to find, see below – is that despite the acres of newsprint and pixels devoted to the Statement already, the UK government’s fiscal stance in each of the next three financial years will change by less than 0.1% of GDP in each year, and in the direction (if such small changes have direction) of looser, not tighter, policy.

Only from 2028/9 does policy become more restrictive than it was (that is, policy changes make the government deficit smaller than it would have been), and even in 2029/30 the tightening amounts to less than a quarter of one percent of GDP. The politically contentious welfare cuts really start from 2028/29, and in 2029/30 amount to between 1% and 1.5% of total welfare spending, also less than a quarter of one percent of GDP.

The widely-reported change to 'fiscal headroom' is a bit bigger, at roughly half of one percent of GDP, but still hardly dramatic in the macro context. It refers to the gap in 2029/30 between what the government can borrow on current account, according to one of its self-imposed rules – see below – and what it seems likely to borrow. This headroom has less direct relevance to the economic outlook, which is shaped by total government activity (on capital as well as current account) in absolute terms, not relative to a benchmark.

The OBR’s growth forecasts have indeed fallen, but only in line with the consensus, and only for the short-term (2025 growth is projected at 1%, down from 2% in October). At the end of the forecast period the level of GDP is no different to what it had been projected to be in October, and despite the media onslaught of recent weeks the upward revision to the main debt ratio at the end of the period (0.7 percentage points of GDP, to 82.7%) is effectively a measurement error, angels-on-the-head-of-a-pin stuff. And as we note often, there is no medium-term (a period of time which lasts longer than a Truss administration) correlation between changes in government debt and the level of gilt yields anyway.

Again, we find ourselves wondering at the UK’s budgetary process. It must be one of the most open fiscal frameworks around, but instead of clarity, the result can be confusion and obfuscation. The OBR’s accompanying, invigilating report runs to 180 very full pages, with four different definitions of government debt, half a dozen different fiscal balances, and three fiscal 'rules' to monitor. It sees many many trees, but no wood. The spuriously-precise nuances in its many multi-year line item projections are in reality dwarfed by forecast uncertainty. The UK government – like its peers – will nonetheless probably be able to borrow what it needs without disturbing yields. The point is not how much it will borrow, but why. The German government has just felt able to transform its likely fiscal stance with barely a pamphlet in support.

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