Countdown to Spring Statement continues

As we enter the month of March the countdown to Chancellor Rachel Reeves’ Spring Statement is entering its final phase. Although Ms Reeves has previously committed to holding one major fiscal event per year, a gloomy economic outlook allied with pressure on the public finances means further tax and spending changes are likely to be announced.

Here we take a look at the state of play as Spring Statement approaches and consider some of the Chancellor’s options.

Wriggle room

The Chancellor appears to be running out of wriggle room amid higher borrowing costs, stubborn inflation, a sluggish economy and a promise to find billions of pounds for additional defence spending.

Analysts at Capital Economics expect the Chancellor’s fiscal headroom to drop from the £9.9 billion announced in October to £2.8 billion. The Office for Budget Responsibility’s (OBR) final ‘pre-measures forecast’ will be key because it will show the Chancellor how much headroom is left within the fiscal rules.

Growth in the UK economy has been weaker than forecast, with the Bank of England, after it halved its GDP growth forecast for 2025 from 1.5% to 0.75%, expecting inflation to peak at 3.7% this summer.

Mixed messages

Ms Reeves told a recent Confederation of British Industry (CBI) conference that there would be no more tax rises on the scale of the Autumn Budget. However, she was then forced to row back on that statement by the Prime Minister, who recently failed to rule out the possibility of tax increases on 26 March.

Sir Keir Starmer said: ‘Obviously I am not going to get ahead of myself until we have made decisions.

‘But as I have said before, in terms of the big decisions on tax obviously the budget was the place that we took those decisions - but as ever, going into a statement I am not going to say in advance what we might do and what we might not do.’

Not for turning

Business leaders have warned that Ms Reeves’s Autumn Budget has damaged economic confidence and claim that the increase in employers’ National Insurance contributions (NICs) will force them to cut jobs or raise prices.

However, Ms Reeves says there will be no U-turns on the Autumn Budget.

She said: ‘I’m not resiling from that Budget in any way. It was a Budget that enabled us to start cutting NHS waiting lists, put more money into defence and return stability to our economy.’

However, is not out of the question that employers may be offered some relief. This might be via an increased Employment Allowance or perhaps a higher threshold before employers' NICs become payable.

Additionally, there could be an announcement on NICs relief for the charity sector, which faces a major funding issue to manage the NICs rise.

There is also the possibility that the Chancellor will try to placate businesses and farmers by increasing the proposed £1 million limit on Business Property Relief and Agricultural Property Relief.

All contribute

The tightening of the fiscal situation has led Lord Mervyn King, the former governor of the Bank of England, to suggest that Income Tax will have to rise to plug the UK's financial blackhole.

He said: ‘The obvious tax to raise is the basic rate of Income Tax, we will all contribute to it.’

However, the Chancellor has previously pledged not to raise personal taxes, including Income Tax, VAT and employee NICs, and is unlikely to break that promise.

Ms Reeves could extend a freeze on income tax bands and allowances beyond April 2028, dragging more people into paying more tax as their pay rises.

This Spring

Whatever happens in the Spring Statement, Mercia’s tax experts will be watching and will provide detailed analysis of the government’s fiscal announcements. Keep your clients up to date with our range of digital products.