Spring Statement – spending cuts kicked down the road, but tax rises looking inevitable

Thomas Pugh, economist at leading audit, tax and consulting firm RSM UK said: “The chancellor has managed to restore her £9.9bn headroom by cutting welfare and departmental spending. The small rabbit out of the hat was an upward revision to growth by the end of the decade due to better planning laws. Ultimately, though, as most of the changes happen beyond 2027 it won’t impact the economy or the Bank of England over the next couple of years and further tax rises are looking increasingly inevitable at some point in the near future.

“As expected, the OBR downgraded its near-term growth forecasts. Growth this year will be just 1% - half its previous estimate. But it revised up its forecast for future growth in every other year. This is partly because there is now more room for faster catch-up growth in the future but also because some of the reforms to planning will start to pay dividends. A bigger economy in 2029/30 will help to boost tax receipts. The obvious risk here is that the OBR is being too optimistic and the economy continues to grow at closer to 1% than the over 1.5% on average forecast. Indeed, the OBR’s productivity estimates continue to look positive.

“Rising interest rates and inflation expectations cost the chancellor £13.1bn, but she managed to claw that back through a combination of welfare cuts, clamping down on tax evasion, departmental cuts and a slightly bigger economy at the end of the decade. However, given that outside of protected departments, such as defence and health, budgets already look like they will have to fall in real times, so there is the continued question of how much of this is just fiscal fiction.

“Financial markets seem to have taken the announcements in their stride with gilt yields more-or-less flat. But there are two big elephants in the room. First, as we’ve already seen it doesn’t take much for £10bn of headroom to be wiped out, another step up in gilt yields or weaker-than-expected growth could see her having to repeat this process in October. Second, given rising spending pressures, especially on defence, further tax rises are starting to look inevitable.”