Assessing Statements on the Spring Statement

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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, which is basically a supplemental budget paired with the Office for Budget Responsibility’s (OBR’s) latest economic forecasts. These packages rarely move the needle, and we think this one is no different, but they provide a good look at investor sentiment.

For good or ill, semiregular fiscal policy tweaks rarely change much. They generate big headlines, but they usually amount to tinkering with taxes and spending at the margins. A few billion here and there seems big to normal people, but UK GDP tops £2.8 trillion annually.^[i] Relative to the UK economy, the changes usually amount to peanuts. So when headlines magnify their importance, it gives us a decent read of how detached sentiment is from reality.

Judging from the reactions Wednesday, it is pretty detached and overall too dour. The OBR halved its 2025 GDP growth forecast to just 1.0%.^[ii] It also increased its forecasts for the ensuing years through 2029, but headlines 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. Others zeroed in on the planned welfare spending cuts, arguing they will exacerbate the cost-of-living crisis. Across the political spectrum, headlines near-universally dismissed Reeves’ claims that these proposals will streamline the public sector, encourage idled workers to rejoin the labor force and foster 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, the package echoes the “austerity” enacted by former Prime Minister David Cameron and his Chancellor, George Osborne, in the early 2010s. Then, the government got a lot of flak for making “cuts,” but in reality, all they did was trim projected spending increases.

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.^[iii] 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.^[iv] The Spring Statement reports 2023-2024’s result as 45.2% and projects 43.9% in 2029-2030.^[v] But with raw spending projected to increase a bit faster now than in the autumn forecasts, the “cuts” look mostly like faster GDP growth to us.

Which shows you how squishy and open to interpretation all this is. In our experience, none of these plans are worth the virtual paper they are PDFed on, because UK governments from both parties have a long history of changing fiscal policy again and again and again. These projections will change again in the next autumn budget. And then once again next spring. And then next autumn. Maybe in between, too—all we got today 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. 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. Stocks don’t look that far ahead.

To us, the story here is more about general economic sentiment. Today’s announcements did nothing to shake the popular perception that the UK economy is floundering, with pending payroll tax hikes about to sap it further. No one is pointing out that the UK has a long history of payroll tax hikes not causing GDP to fall, markets to plunge or unemployment to soar. Businesses have generally been able to swallow them and move on. Similarly, while 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. UK GDP and household spending have still grown, and UK stocks participated in global bull markets.

When in doubt, trust the market. UK stocks are up 9.6% year to date, through Tuesday’s close, trouncing global stocks’ 1.3%.^[vi] All the tax hikes and weak growth chatter hogging headlines are well-known. Have been for months. Markets see them. And are up, which is a very strong indication they have priced the fear and moved on—and demonstrated the wisdom of being bullish where others are fearful.