Iron Chancellor Holds her Nerve
Key Points
Having pledged to only deliver one major fiscal event per year, Chancellor Rachel Reeves never intended for the Spring Statement to be heavy on new policy measures. However, the country’s worsening fiscal position necessitated a response, with the Office for Budgetary Responsibility (OBR) forecasting that higher debt interest payments and weaker growth had created a fresh £14bn shortfall.
In opposition, Reeves pledged to be an “Iron Chancellor,” but her emphasis on fiscal discipline is generating increasing alarm across the Labour party and its wider political ecosystem as totemic spending on welfare and overseas aid has been slashed in response.
Despite mounting calls for her to relax or reconsider her fiscal rules which were drawn up against a different geopolitical backdrop and which some argue give the OBR, a bureaucratic body, too much influence over the policies of the elected Government, Reeves gave a bullish defence of her approach, describing fiscal discipline as “non-negotiable.”
Reeves’ big gamble is that the plethora of growth measures the government has already announced—from planning reform to accelerate housebuilding and infrastructure through to the Industrial Strategy and regulatory reform—will start to pay dividends sooner rather than later, restoring her fiscal breathing room.
However, the UK is not entirely the master of its own destiny with much depending on what happens in the global economy as a result of President Trump’s forthcoming tariffs package next week; the OBR estimates that even if the UK itself is spared the worst the wider economic disruption could by itself reduce UK GDP by up to 1% and wipe out the targeted surplus all over again.
For now, Reeves’ position appears safe with the majority of Labour MPs prepared to grit their teeth and continue down the current path. However, there is a clear demand for the Chancellor and other key Government figures to set out more clearly an optimistic destination. Meanwhile, if the UK’s fiscal position continues to deteriorate, the voices calling for a rethink on the fiscal rules and/or on further tax rises will get louder and more forceful.
Analysis: Will Reeves convince Labour MPs to hold the line?
On last week’s edition of the BBC’s Newscast, Political Editor Chris Mason was asked to provide a song for his personal playlist, as King Charles recently did. Mason selected a track by the American artist Shaboozey, whose most recent album is the acclaimed “Where I’ve Been Isn’t Where I’m Going.” Labour figures surveying the aftermath of the Spring Statement will be hoping that similar sentiments ring true.
When Reeves first set out her fiscal rules, they were designed to reassure a doubting electorate and nervous businesses that Labour could be trusted to run the economy. In her Mais Lecture in March 2024, Reeves outlined key tenets of agenda, intended to insulate against political shocks and build an economy on the pillars of stability, investment and reform. These would provide the foundation for the sustained economic growth that would be the Labour Government’s overarching Mission, allowing them to “fix broken Britain.”
Ahead of the last election, Labour strategists knew that economic credibility was critical to winning. So, as opinion polls consistently recorded Labour as the party most favored to manage the economy, they had cause to celebrate. Pledges not to raise income tax or National Insurance “for working people” were further designed to seal the deal as voters went to the polls in July 2024, and Labour candidates queued up to pledge their allegiance to the Starmer-Reeves doctrine, even amid some concerns that Rishi Sunak and Jeremy Hunt’s NI cuts were unviable and designed to trip Labour up in office.
Any initial euphoria on entering government was soon tempered by what they found in the cupboards and filing cabinets of Whitehall. Labour knew things were bad, and of course it is the political imperative to let this be known, but they were even worse than some had thought. Labour’s Plan A of kickstarting economic growth quickly ran into problems, not least as a result of the tax rises in the Budget, followed soon after by the re-election of Donald Trump who set about blowing up the already tottering global economic and security order.
This has given way to a plethora of unpalatable options to get back on track, such as cutting welfare and raiding the foreign aid budget as the economy stubbornly flatlines, growth predictions stall and the cost of borrowing spikes. Meanwhile, the £9.9bn headroom that the Chancellor thought had been created in October has been wiped out.
The Chancellor has made it abundantly clear that the fiscal rules, restrictive as they are, will not change in the foreseeable future. This is not surprising. Economic stability is everything to this government, and there remain very real concerns among Labour strategists post-Truss about the market reaction should they not be seen as having a firm grip on the economic tiller. Moreover, any such change would undermine the “return to stable government” mantra that the Prime Minister has been keen to project.
As always on such occasions, the Chancellor knew that today’s statement would have to speak to a range of audiences, not least Labour backbench MPs. Still, she was at pains to trumpet “Labour measures” that the government is progressing, in areas such as NHS waiting lists and raising the minimum wage. Announcements of significant funding to build more homes and to help people into work will have been welcomed.
However, Labour MPs will have noted with concern how little attention was given in the statement to the impact of welfare cuts in the measures she announced. It is unlikely that significant numbers of Labour backbenchers already asked to swallow cuts to disability benefits, Winter Fuel Payments, lack of compensation to WASPI women and cuts to the foreign aid budget among other measures, will be reassured by today’s statement. The strength of feeling that they did not become Labour MPs in order to advance such an agenda is palpable, and there is genuine anger in some quarters about the political choices that the Chancellor has made or why she is “using only one club in her bag.”
Of course, the Chancellor and her supporters would argue that they are delivering on the renewal agenda with billions raised in tax at the Budget to rebuild tattered public services, and that the negative business response to that means that card cannot be played again so soon. They would also point to greater flexibility within the fiscal rules to allow for capital investment, as well as the whole host of pro-growth measures announced in recent weeks intended to “unleash the animal spirits of the private sector.”
Nonetheless, the clamor for a genuine debate about fiscal rules is unlikely to abate despite the Chancellor’s robust performance, as economic orthodoxy meets negative impact and is reflected in MP caseloads. The Impact Assessment on these changes—also published today, estimates that the average claimant in receipt of Personal Independence Payments (PIP) will lose £4,500 per year. 800,000 previous PIP recipients will no longer receive it. 150,000 Carers Benefits will no longer be paid, and relative poverty will increase for 250,000 people. This will be very difficult for Labour backbenchers to swallow.
It will also have been noted within Labour that a perceived lack of a narrative of what these measures are for, the question of whether this Labour government will be characterized by “austerity” measures that previous Conservative governments have baulked at and no indication of when (or indeed whether) the “sunlit uplands” will ever arrive. The OBR analysis that people will be an average £500 better off each year will be some reassurance, but it won’t make those siren voices go away.
For now, the course is set and is unlikely to change imminently. Labour Party strategists are aware that they have a lot of time before the next general election and change is a constant in politics. But it is also true that if a “perfect storm” of voices from business, trade unions, the parliamentary party and voters all think the government is on the wrong path, then a course correction becomes more likely than not. And the indications are that this storm is brewing.
Global instability may yet provide some cover for further “correction.” Defence spending needs to rise even beyond the 2.5% uplift, and the argument that when the facts change, a change of mind is the right thing to do would be politically defensible—especially given the potential to create jobs and boost the economy through this approach. It is aligning the economic strategy with political nous that is the key challenge for this government. Many of the po-growth measures announced will take years to show that change is happening while MPs’ and voters’ patience is finite.
Within the Labour Party, Reeves’ technical competence is beyond question but the jeopardy for her lies in her political acumen. If the two do not align—and soon—the ground beneath a previously unassailable Chancellor may yet begin to shift.
Summary: What policy measures were announced?
Today’s Statement was shorter than expected with the Chancellor speaking for just over half an hour, with a core focus on the Government’s efforts to reform planning, an emphasis on their commitment to increase defence spending and detail on their plans for welfare.
In what the Treasury have been keen to bill as an “economic update” on the public finances, Rachel Reeves began by championing the work of the Labour Government to date, pointing to interest rate cuts, falling NHS waiting lists and increasing the National Living Wage. Now, she said, it is the Government’s task to secure the country’s future “in a world that is changing before our eyes.” She argued that “this moment demands an active government… helping Britain to reach its potential.”
Following recent speculation over whether the Chancellor would relax her self-imposed fiscal rules to help limit the scale of spending cuts, in today’s statement Reeves doubled down on her rules, saying they are “non-negotiable.” She set out that the statement restores the Treasury’s fiscal headroom in full and in line with these fiscal rules. Despite a cut in this year’s growth forecast from 2% to 1%, the Chancellor was able to point to the relatively more positive news that the OBR expects the economy to grow by 1.9% in 2026, with further increases each year for the remainder of this Parliament.
Reeves also confirmed that day-to-day spending will increase in real terms above inflation in every single year of the forecast and that “in the spending review, apart from reductions in overseas aid, day-to-day spending across Government has been fully protected.” On capital spending, she stated that she is increasing it “by an average of two billion pounds per year compared with the autumn.”
Defence spending formed a central part of today’s statement, as the Chancellor reiterated Labour’s commitment to increased investment. She set out that she wants Britain to become a “defence industrial superpower” and pledged that the Government “will put defence at the heart of our modern industrial strategy.” Her speech included a range of commitments on defence, including investment in new technology, reform of the procurement system, military homes and plans for Barrow and Portsmouth. The Chancellor also committed to “£2bn of increased capacity for UK export finance to provide loans for overseas buyers of UK defence goods and services.”
Also forming a core part of the Chancellor’s statement were the Government’s plans on welfare reform. Reeves sought to position Labour as the party of work, saying “We believe that if you can work, you should work. But if you can’t work, you should be properly supported.” Further to last week’s announcements by the Secretary of State for Work and Pensions, Reeves stated that the Government will invest £1bn per year by 2029-30 in employment and health support to reduce economic inactivity. She set out that the Universal Credit standard allowance will rise above inflation, reaching £106/week by 2029-30, while the health element will be frozen for existing claimants and reduced for new ones. She also confirmed that reforms to Personal Independence Payment (PIP) and the Work Capability Assessment are forecast to save £4.8bn by 2029-30.
Savings were also outlined in the Government’s drive to reform the British state, with the Chancellor reiterating the decision to abolish NHS England and to reduce the costs of running government. She announced the bringing forward of £3.25bn investment to deliver public service reform through a new transformation fund. Reeves also confirmed the first allocations from that fund, including funding for voluntary exit schemes to reduce the size of the civil service. The Chancellor also sought to highlight the unfairness of working people paying their taxes while others evade theirs, setting out additional measures to tackle tax evasion. These, she argued, will raise an additional £1bn.
Planning and infrastructure were also central to the Chancellor’s statement, as she reflected on the changes made since Labour took office in July, most notably their reforms to the National Planning Policy Framework (NPPF). The OBR, she declared, have concluded that the Government’s planning reforms will “permanently increase the level of real GDP by 0.2% in 29-30, an additional £6.8bn for our economy. And by 0.4% of GDP in 10 years, an additional £15.1bn in our British Economy.” This, she noted, is “the biggest positive growth impact that the OBR have ever reflected in their forecast for a policy with no fiscal cost.”
Today’s statement was a confident performance by a Chancellor determined to tackle her critics head on. Whilst light on new policy announcements, Reeves sought to double down on her approach in an effort to convince the country, and Labour MPs, that it is working. The extent to which she was successful won’t be known until the dust settles over the coming weeks, and the impact of today’s decisions becomes clear.
Key Reactions
Policy and Politics
“There were some bright spots in today’s Spring Statement: planning reforms are judged by the OBR to boost the economy, and the government deserves credit for protecting investment spending in tough fiscal conditions. But overall, this was a holding exercise ahead of the really significant decisions later in the year. The June Spending Review will be where the Chancellor’s tighter spending plans crystallise into specific choices and start bumping up against reality, and against her cabinet colleagues.”
— Paul Johnson, Director, Institute for Fiscal Studies
“This country was growing at the fastest rate in the G7 only about a year ago…now we learn the OBR has stated, growth has halved this year, cut in two as a consequence of the decisions and the choices that the Right Honourable Lady made on her watch.”
— Mel Stride MP, Shadow Chancellor
“Rachel Reeves has had the awkward task of fronting a halving of growth forecasts calculate by the OBR for this year. But the chancellor scored a victory by persuading them to assimilate an expectation of the results of her planning reform policies in their longer-term forecasts for growth. That took some negotiation but added £15bn to the expectations of the economy’s income over 10 years—an assumption that eases some of the challenges for the public finances. But, as ever, remember that forecasts are uncertain.”
— Dharshini David, Deputy Economics Editor, BBC
“I recognise the difficulties that (Ms. Reeves) is facing in terms of fiscal challenges and so on that she inherited, and I also support the reforms (Work and Pensions Secretary Liz Kendall) has set out. But all the evidence is pointing to the fact that the cuts to health and disability benefits will lead to increased poverty, including severe poverty, and worsened health conditions as well. How will making people sicker and poorer help in terms of driving our economy up and people into jobs?”
— Debbie Abrahams MP, Chair of the Work and Pensions Select Committee
Markets and business
UK equity and fixed income markets were broadly flat in response to the Chancellor’s Spring Statement, a theme echoed in investor commentary on the event. Tim Service, Investment Manager at Jupiter Asset Management, typified this view by calling the statement a “non-event.” Nevertheless, investors drew attention to three key takeaways from the speech: slow growth, cutting red tape, and opportunities to invest in UK property, small and mid-sized companies.
While Chancellor Reeves was at pains to emphasize how the measures announced in today’s statement would stimulate growth, investors noted the economy’s slow growth rate—likely to be exacerbated by the ongoing global trade war. Huw Davies, Investment Manager at Jupiter Asset Management, commented, “The immediate market reaction was positive on the view that the news wasn’t even worse, which is a sign of how poor sentiment around the UK has been recently.” His colleague, Vikram Aggarwal, concurred, adding, “it feels like the government is attempting to drip-feed negative fiscal and borrowing news to the market.”
On a more positive note, investors welcomed the Chancellor’s commitment to cutting red tape. Saker Nusseibeh, CEO of Federated Hermes Limited, praised the government’s shift to “embracing simplicity and a pragmatic approach to regulation.” Similarly, Jupiter’s Service suggested this will help to bolster appetite for UK equities, commenting, “[f]or the first time in a long while, there appears to be a joined-up attempt to fix the problems in UK capital markets, between Treasury, the Stock Exchange, and the regulators.”
Rain Newton-Smith, CEO of the CBI described the weaker growth as “a serious setback but not a surprise given the burden businesses are shouldering after the Budget” but welcomed that the Chancellor had kept her promise to business, made at our conference, not to raise the burden further and added that “It is the right approach that the government asks of the public sector the same as it has been expecting of business since the Budget—to absorb costs through agility, modernization and innovation.”
Next Steps
Today’s Spring Statement kicks off an intense period of political activity in the coming weeks and months which will see the Government’s first major electoral test since coming to office, the fleshing out of key parts of its domestic agenda as well as major international diplomatic initiatives.
2 April, Trump Tariffs: President Trump is set to unveil his “reciprocal” tariff package primarily targeted at trade partners with which the US has a large trade deficit. Even if the UK is spared the worst, as per the OBR forecast cited above, the wider economic disruption could still impact UK growth.
1 May, Local Elections and Runcorn by-election: The Government’s first major electoral test. While the local elections are unlikely to be too painful given that most seats are Conservative defenses, Nigel Farage will be eyeing up the Runcorn and Helsby by-election as an opportunity to prime opportunity to give the Government a bloody nose and demonstrate that Reform are the main challengers to Labour.
19 May, EU-UK “reset” summit: A key strategic priority for the Government both as regards defence and security as well as growth. However, well-established irritants in the UK-EU relationship (fish, migration) threaten to hold up progress and a substantial body of political and public opinion would like the UK to go further and faster on EU relations particularly given the UK’s growth challenges and the approach of the Trump administration in the US.
11 June, Spending Review, Industrial Strategy and Defence Industrial Strategy: The Government will unveil several major set pieces that it hopes will shape the UK’s economic and strategic direction. The multi-year Spending Review will set departmental budgets and public spending priorities for the coming years, making it a critical moment for determining how resources are allocated across government. Published alongside the Spending Review, the Industrial Strategy and Defence Industrial Strategy will set out the Government’s coordinated efforts to fuse public investment with industrial and national security priorities.
Materials presented by Edelman’s Public & Government Affairs experts. For additional information, reach out to Mohammed.Hussein@EdelmanEGA.com
