Assessing Statements on the Spring Statement

Editors’ Note: MarketMinder Europe prefers no politician nor any party. We assess developments for their potential economic and market effects only.

Spring is here, which apparently can mean only one thing: It is time for another round of UK fiscal policy changes! Yes, before all the changes in October’s Budget have even taken effect, Chancellor of the Exchequer Rachel Reeves delivered the “Spring Statement” Wednesday. Our research suggests these packages rarely move the needle in terms of economic growth or public finances, and we think this one is no different, but they can provide a good look at investor sentiment.

For good or ill, we find semiregular fiscal policy tweaks rarely change much. They tend to generate lots of buzz in publications we follow, but they usually amount to tinkering with taxes and spending at the margins. The multi-billion pound changes represent objectively large sums of money, but UK gross domestic product tops £2.8 trillion annually.^[i] Relative to the UK economy, the shifts aren’t typically massive. So when headlines we follow magnify their importance, it gives us a decent read of how detached sentiment is from reality.

Judging from the reactions we observed Wednesday, we think sentiment is pretty detached and overall too dour. The Office for Budget Responsibility (OBR) halved its 2025 GDP growth forecast to just 1.0%.^[ii] It also increased its forecasts for the ensuing years through 2029, but commentators we follow dwelled on the 2025 downgrade, arguing Britain’s prospects are dismal. Most warned Reeves’ proposed investment increases won’t be enough to get the economy humming and her planned spending cuts won’t create enough deficit wiggle room, almost surely teeing up massive tax hikes later this year as the deficit balloons and the economy stagnates.^[iii] Others zeroed in on the planned welfare spending cuts, arguing they will exacerbate the cost-of-living crisis.^[iv] Across the political spectrum, headlines we follow near-universally dismissed Reeves’ claims that these proposals will streamline the public sector, encourage idled workers to rejoin the labour force and foster economic growth through permitting reforms and public investment.

So sentiment strikes us as decidedly negative—and an outsized reaction to what amount to very, very small changes. On the public spending front, we think the package echoes David Cameron and former Chancellor George Osborne’s so-called austerity in the early 2010s. Despite widespread criticism around their purported budget cuts, they simply trimmed projected spending increases.^[v]

Based on our read of the Treasury’s published materials, this is a sequel. Reeves pledged to “save £4.8 billion from the welfare budget in 2029-2030” by reforming various credits and shave 15% off departmental spending budgets by that same fiscal year.^[vi] Yet the projections still show spending rising. Some categories are rising at a slower rate than last autumn’s Budget projected, but others are growing faster. The cuts appear to be in projected spending relative to GDP, which autumn’s Budget projected would fall from an expected 44.9% of GDP in fiscal 2023-2024 to 44.5% in 2029-30.^[vii] The Spring Statement reports 2023-2024’s result as 45.2% and projects 43.9% in 2029-2030.^[viii] But with raw spending projected to increase a bit faster now than in the autumn forecasts, the cuts look mostly like the fruit of faster projected GDP growth to us.

In our view, this shows how squishy and open to interpretation all this is. In our experience, none of these plans are worth much, because UK governments from both parties have a long history of changing fiscal policy again and again and again. These projections will likely change again in the next autumn budget. And then once again next spring. And then next autumn. Maybe in between, too—all we got Wednesday were the broad brushstrokes. The details won’t come out until the official Spending Review, scheduled for mid-June.

Therefore, in our view, how these plans might affect the UK’s economic outlook is probably beyond the point. We think even the concrete plans announced, like finally building a third runway at Heathrow Airport, are too far out to factor in now. The Spring Statement estimates enhanced infrastructure linking Oxford and Cambridge into a robust research hub will boost growth 10 years out.^[ix] Stocks don’t look that far ahead, based on our research.

To us, the story here is more about general economic sentiment. In our view, Wednesday’s announcements did little to shake the popular notion that the UK economy is floundering, with the pending employer national insurance contribution (NIC) increase about to sap it further. We haven’t seen anyone pointing out that the UK has a long history of higher employer NIC not causing GDP to fall, markets to plunge or unemployment to soar.^[x] We find businesses can generally swallow them and move on. Similarly, whilst income tax bands remain frozen, exposing more middle-income earners to rates intended for the highest earners only, that freeze has been in place since 2021.^[xi] UK GDP and household spending have still grown, and UK stocks participated in global bull markets (long periods of generally rising equity prices).^[xii]

When in doubt, we recommend looking to the market. UK stocks are up 6.4% year to date, through Wednesday’s close, trouncing global stocks’ -2.5% fall.^[xiii] All the tax hikes and weak growth chatter amongst commentators we follow is well-known. Has been for months. In our view, markets see them. And markets are up, which we think is a very strong indication they have priced the speculation and moved on—and demonstrated the wisdom of being bullish where others are fearful.