Spring Statement 2023: What You Need to Know About Britain's Economic Future

The Spring Statement 2023 has finally arrived, and with it, a glimpse into Britain's economic future. The Chancellor's announcement aims to boost growth and tackle the cost of living crisis.

The UK's economy is expected to grow by 3.7% this year, according to the Office for Budget Responsibility (OBR), with a forecasted 1.8% growth in 2024.

The Office for Budget Responsibility (OBR) forecasts 1% economic growth in 2025, increasing to 1.9% by 2026. This is a significant growth projection.

Inflation is projected to be 3.2% in 2025, which is a notable figure. This could have implications for consumers and businesses alike.

The budget is expected to move from a deficit of £36.1 billion in 2025-26 to a surplus of £9.9 billion by 2029-30. This is a significant shift in public finances.

The OBR's forecasts are sensitive to productivity growth, which has been negative for some time. This makes it challenging for the government to convince the OBR to lift growth forecasts.

Here are some key economic forecasts to keep an eye on:

The government has announced significant spending cuts across various departments to balance the budget. Welfare cuts are expected to affect 250,000 people, including 50,000 children, and reduce health-related benefits by £4.8 billion by 2029-30.

Departmental spending will be reduced by £3.6 billion, with specific areas of reduction yet to be detailed. This could lead to a 15% reduction in government operating costs by the end of the decade, resulting in around 10,000 job losses.

The Treasury is expected to inject more cash for the 2026 fiscal year, with some predicting a 2% increase in real terms, up from current plans of 1.4%. This could add another £10 billion/year to the current budget deficit by the end of the decade.

To achieve this, the government may need to curtail its future spending ambitions, with some predicting a yearly growth of 0.8% in real terms beyond the next 12 months. This would be a significant reduction from the current average growth of 1.3% per year.

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Here are some key statistics on government spending:

The government's fiscal rules are being tightened, with a move from a rolling five-year horizon to a three-year horizon. This is designed to make the rules more credible in the eyes of investors, but it also limits the Treasury's ability to avoid painful decisions on spending this year.

Tax and welfare changes are expected to be a major focus of the Spring Statement. The government aims to recoup £10 billion in lost headroom due to higher debt interest forecasts, and one way to do this is by cutting welfare spending. The goal is to save £5 billion per year on welfare, which would be achieved by trimming departmental budgets.

The government has already announced £4.8 billion in welfare spending reductions by 2029-30, primarily affecting health-related benefits. This is expected to increase relative poverty for 250,000 people, including 50,000 children.

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Some benefits will see increases, such as the universal credit standard allowance, which will rise from £92 per week in 2025-26 to £106 per week by 2029-30. However, the universal credit health element will be cut by 50% and then frozen for new claimants.

The government is also planning to merge jobseeker's allowance (JSA) and employment support allowance (ESA) into a new unemployment insurance system. This will be paid at a higher rate without having to prove you can't work, but people who've worked will get more than those who haven't.

It's worth noting that the government has confirmed there will be no tax increases or reductions at this time, with any potential changes to tax rates being postponed until the autumn.

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The government has announced a range of welfare reforms and spending cuts, which will have a significant impact on public services and individuals receiving benefits.

Welfare cuts are expected to save £4.8 billion by 2029-30, primarily affecting health-related benefits, which will increase relative poverty for 250,000 people, including 50,000 children. These cuts will also see the universal credit health element cut by 50% and then frozen for new claimants.

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The government has emphasized the need to "get a grip" on welfare spending to make the system fairer to both taxpayers and people receiving benefits. Key announcements include an increase in the universal credit standard allowance from £92 per week in 2025-26 to £106 per week by 2029-30.

The number of people claiming personal independence payments (PIP) is expected to double in the next decade, from 2m to 4.3m, which is unsustainable and could cost over £34 billion a year. This increase is seen as a major concern by the government.

To put the welfare cuts into perspective, here is a breakdown of the expected savings:

The government has also announced that it will reduce day-to-day departmental spending by £3.6 billion, with specific areas of reduction yet to be detailed. This will have a significant impact on public services and individuals relying on these services.

The public finances are operating on increasingly fine margins, and spending pressures are far from diminishing. This means that even before any cutbacks, per-capita real terms spending on public services is already projected to increase by less than one percent a year from 2026 onwards.

Further tax increases are likely to be on the horizon, and it's not just a matter of speculation - the article suggests it's now inevitable. The Treasury has already centred its tax rises on businesses via a sizable increase in employers National Insurance, and it's possible this strategy will be repeated later this year.

By European standards, employer social security contributions are still relatively low as a share of an average worker's salary. This might be a factor in the Chancellor's decision-making process.

The impact of the current round of tax hikes on the jobs market is a key consideration. So far, the evidence is mixed, with surveys pointing to a weaker hiring appetite, but the official employment data hasn't worsened yet.

The Spring Statement has announced significant changes in defence and investment. An increase of £6.4 billion in defence spending is planned by 2027.

This increase in defence spending is to be funded by cuts to overseas aid. The government aims to allocate 2.5% of GDP to defence from April 2027.

In addition to defence spending, the government plans to direct an extra £2 billion annually towards capital projects, including infrastructure and housing. This boost in capital investment is expected to stimulate economic growth.

Higher debt interest costs have wiped out the Chancellor's wiggle room, making it even more challenging to balance the budget.

The UK's government bond yields rose after the October budget, even as US rates slipped back, and Bank of England rate cuts were priced out. This means higher debt servicing costs, which have eliminated the limited breathing room the Chancellor had.

Fortunately, the wider economic backdrop hasn't materially worsened since October, but lower growth and higher inflation largely net out, meaning nominal GDP forecasts shouldn't look too different to last October.

Higher utility bills are likely to contribute to higher inflation, which is not what the Office for Budget Responsibility predicted back in October.

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The Spring Statement is scheduled to take place on Wednesday, 26 March. This is when the chancellor will make their announcement in Parliament.

The Office for Budget Responsibility (OBR) will provide its estimates on the economy to the Treasury beforehand, which will be a crucial factor in the chancellor's policy decisions.

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The government has announced spending cuts across various departments to balance the budget, with the civil service expected to bear the brunt, facing a 15% reduction in government operating costs by the end of the decade.

These cuts could lead to around 10,000 job losses and affect public services, making it harder for the public to access necessary services.

Some spending cuts seem to be "on the table", with a reduction in health-related benefits expected, and a "persistent rumour" that the chancellor could extend the freeze on income tax thresholds beyond 2028.

The Treasury has likely lost all of the £10bn 'headroom' it had available under its fiscal rules last October, following a rise in government borrowing costs over the winter.

Cuts to welfare and future departmental spending growth should be enough to regain that lost ground and meet the fiscal rules.

Tax rises are unlikely this month, but look increasingly inevitable in the autumn.

Reduced health-related benefitsExtended freeze on income tax thresholdsReformed inheritance tax gifting allowancesScaled back cash ISA allowance

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