Rachel Reeves claims she put the UK’s finances on a stable footing. However, the government’s fiscal watchdog on Wednesday revealed how the prime minister could lose his balance.
The Prime Minister’s Spring statement left her with a £9.9 billion error in the “non-negotiable” fiscal rules that require the current budget to be balanced by 2029-30.
“The array of potential claims about small amounts of headroom is large and diverse,” OBR Chair Richard Hughes warned Reeves only gives 50% chances of meeting their targets.
“All risks to UK productivity, interest rates and global tariff outlook can be reduced to zero.”
The £14 billion financial repair job Reeves undertaken on Wednesday was not intended to happen in the first place. Last year, she vowed to host one major financial event each year, but left the requirements for OBRs to provide forecasts in both the spring and fall.
Higher than expected borrowing figures and rising debt interest have drawn the Treasury into a £4.1 billion shortfall against key current budget rules, based on OBR’s new forecasts.
Reeves revised the course with a combination of welfare cuts, tax avoidance crackdowns, and daily divisional spending.
However, the Prime Minister remains in dangerous fiscal waters. The underlying public sector net debt is projected to continue to rise until the end of Parliament despite spending cuts, reaching 95% of GDP in 2029-30 in 2029-30, reaching 95% of GDP compared to 89% now.
It said it is expected to rise to a postwar high of 37.7% of GDP from 2027 to 2028. Total public spending was set to rise to 45% of GDP between 2025 and 26 before the later cuts begin to take effect, but in 2029-30, 4.2% of GDP will surpass that pre-pandemic level.
OBR has pulled this year’s short-term growth forecast from 2% to 1% from 1%. It assumes that GDP growth will recover after Parliament, aided by a favorable estimate of the impact of Labour’s planning reform.
Reeves was eagerly seized on Wednesday for the forecasted recovery, but like many other assumptions supporting the UK’s financial outlook, economists warned that it could soon be resolved in contact with harsh economic realities.
Andrew Wishart of Belenburg calls the growth figures “surprisingly bullish.” David Page, chief economist at Axa Investment Management, also called “rosy” predictions into question, warning that Spring Statement “is unlikely to prove its last words about efforts to curb the finances.”
The market calmly greeted the spring statement, and although the pound is stable, gold leaf in 10 years closed from 0.025 percentage points to 4.73 percent as debt prices rose. This was a big contrast to the October budget, with plans for borrowing that exceeded expectations contributed to the sale in gold leaf.
Nonetheless, Matthew Morgan, head of bonds at Jupiter Asset Management, said the Reeves statement represents a “Kick-the-Can exercise” and that the UK’s finances were “very challenging.”
One of the only biggest risks to the fiscal outlook is the OBR’s judgment regarding productivity, a key determinant of UK fiscal destiny.
Productivity has been inexplicably weaker over the past two years, leaving the real risk that it cannot be picked up as much as OBRs are currently predicting.
OBR has reduced its medium-term productivity growth assumption from around 2.2% to 1.25% over the past decade. The OBR warned that the uncertainty about its productivity assumptions is “still high.”
If production per hour grows annually, if it remains at the current rate of 0.3% over a five-year forecast period, the current budget will close the deficit 10 years at about 1.4% of GDP, with Reeves losing its accounting target of £48 billion.
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Similar to the escalation of trade tensions, relatively small increases in global interest rates could also wipe out her headroom. If the US extends a 20% point tariff increase to imports of all goods, the increase in government spending and increased increases in inflation-related to government expenditures will “effectively eliminate” from current budget rules by 2029-30, OBR said.
The financial and economic benefits from the policy measures that Reeves stated were also very uncertain, the OBR said, particularly regarding welfare reforms, in which the government did not give sufficient details of its policies.
It was not yet clear how many people would be helped by the new employment support programme, or whether new spending on defense would be spent on equipment produced in the UK or overseas. Furthermore, the OBR did not seek to assess whether it intended to upgrade government workers’ rights or whether its promotion of deregulation would promote growth.
The OBR also said “great uncertainty” about the impact of welfare reform and the fact that the government had not yet said how it would fund its ambition to raise defensive spending to 3% of GDP exacerbated the risks on the fiscal outlook.
Reeves is also heading towards a tight divisional spending settlement in June. According to the OBR, spending on unprotected government sectors such as the Ministry of Home Affairs may need to be reduced by 0.8% per year from 2026-27 to reduce by 0.8% per year.
And Reeves claimed that she was determined to realize Britain’s “significant commitment to defense,” but her increase in spending to 2.5% of GDP may prove just a down payment, not just because Europe was under pressure from the US to stand militarily.
“There’s an unfinished atmosphere of business here,” said Pauldales of Capital Economics. “Reeves said the world is changing, but fiscal policy hasn’t changed at all. That’s a bit of a piece together and a big change is going well.”
Additional Reports by Ian Smith of London
