Will Spring Statement become an Emergency Budget?

There are only a couple of weeks to go until Chancellor Rachel Reeves is due to deliver her Spring Statement to Parliament. What was initially billed as a low-key occasion thanks to the Chancellor’s commitment to only hold one major fiscal event a year is shaping up to be more significant. A combination of political, economic and fiscal factors could force Ms Reeves into an Emergency Budget on 26 March.

Faltering growth

Economic growth has faltered since Ms Reeves’ Autumn Budget, which saw a record £40 billion in tax rises, while inflation is up and there has been a sharp rise in government bond yields.

The Chancellor has set herself strict limits on public borrowing and her fiscal headroom is expected to have dropped significantly from the £9.9 billion reported last October.

This will leave the Chancellor with a set of tough choices around tax rises and/or spending cuts.

Many of these will be politically unpalatable, with businesses still reeling from the increase in employer’s National Insurance contributions (NICs) and Labour MPs nervous about imposing austerity measures.

Fiscal trap

The need for tax hikes and deeper spending is a fiscal trap of the Chancellor’s own making, according to the Institute for Fiscal Studies (IFS) think tank.

The Chancellor’s rules around borrowing have left Britain’s economic policy ‘entirely exposed’ to global changes.

Matthew Oulton, Research Economist at the IFS, said: ‘Rachel Reeves has engineered a trap for herself, albeit in difficult circumstances. Aiming to meet inflexible, pass–fail fiscal targets by the slimmest of margins was a risky strategy from the outset.

‘It was always possible that economic conditions would deteriorate, put her on track to miss those rules, and push her into making tax and spending changes at what isn’t supposed to be a fiscal event later this month.

‘This scenario is far from guaranteed and she could still get lucky. But if not, she will have to choose between her fiscal rules and her commitment to holding only one fiscal event per year.’

What is safe?

If cuts are made then there are just three areas of protected spending - defence, the NHS and schools.

The NHS budget was tied into the reform of the health service and guaranteed at the Autumn Budget. Since then events in Ukraine and the actions of President Trump forced the decision to take defence spending up to 2.5% by 2027 and 3% after the next election.

The schools’ budget has also been protected, but this means that every other department will be expected to ‘find efficiencies’, which is Whitehall speak for cuts.

Where will the cuts fall?

The increase in the defence budget is largely being paid for by a cut in foreign aid, while Ms Reeves has also indicated that welfare is going to be a major target.

There appears to be little room for significant tax rises, especially after the election commitment not to raise VAT, Income Tax or employee NICs.

The only other option is that Ms Reeves breaks one of her rules and borrows more money. This, though, will increase the cost of borrowing at a time when UK government gilts which underpin that borrowing are high.

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.