No new tax rises were announced by chancellor Rachel Reeves in Wednesday’s spring statement. Instead, the government announced plans to cut welfare and benefits to plug holes in the public finances.
Reeves came to office promising only one major fiscal event per year, the autumn budget, with the spring statement being relegated to a financial update, meaning new taxes or major spending commitments were always unlikely.
But Prime Minister Kier Starmer’s commitment to increase defence spending to 2.5% of GDP by 2027 – three years earlier than planned – and revised forecasts from the Office of Budget Responsibility (OBR), put pressure on Reeves to find savings to meet her self-imposed fiscal rules.
OBR’s gloomy outlook dampens spring statement
Reeves blamed increased geopolitical uncertainty for the government’s spending cuts.
Since the autumn budget, the Trump administration’s tariffs on trading partners have disrupted the global economy and weakened business sentiment. The global economy has become “more uncertain”, Reeves said, with more “unstable trading patterns” and rising borrowing costs for most major economies.
In response to this uncertainty, the OBR has halved its growth predictions for the UK economy from 2% to 1%. Reeves said she was “not satisfied with the numbers” for this year; however, the OBR has upgraded its growth predictions for the years after.
According to the OBR’s new calculations, the £9.9bn surplus Labour generated in the autumn budget will be more than wiped out by interest payments on government debt by 2029-30, instead leaving a £4.1bn deficit.
Rain Newton-Smith, CEO of The Confederation of British Industry, has called on the government to “double down on unlocking investment to secure a more positive outlook for long-term growth”.
Inflation is also forecast to rise to 3.2% this year, according to the OBR, up from the 2.6% it predicted in October. Inflation is not expected to return to the Bank of England’s 2% target until 2027.
No tax rises were announced but the chancellor claims she’ll raise an additional £1bn by cracking down on tax evasion.
No U-turns on national insurance
Some business leaders had hoped for a U-turn on policies including the increase to employers’ national insurance contributions, which they claim will burden employers with unsustainable additional costs.
No such changes were announced, however. Ben Willmott, head of public policy for the Chartered Institute of Personnel and Development, said the government had been quick to add costs and regulation to businesses through national insurance hikes and the employment rights bill, but failed to recognise “the need to provide more support for employers”.
Critics warn that this will likely erode fiscal confidence at a time when the UK urgently needs a growth spurt. “The increase in total wage bills will be a heavy weight for both small and large businesses,” says Lisa Miles-Heal, CEO of Silverfin, an accounting software firm. This will leave some businesses with limited operating headroom, she adds.
Higher capital gains tax and reduced R&D tax credits are also making the UK less attractive for investment, stresses Ed Bradley, CEO at Virtualstock, a software firm. “We need policies that support businesses rather than deter them. Otherwise, we risk losing businesses and talent to more favourable markets abroad.”
The chancellor also committed to “slowing down regulatory barriers in every sector of our economy”. This is a positive step towards fostering growth, but simplification must not come at the expense of accountability, experts say. “It’s important that streamlining does not lead to lapses in compliance or increased exposure to financial risk,” says John Phillips, general manager at FloQast, an accounting software provider.
Welfare cuts and getting people back to work
Reeves stressed that those who can work, should work, as she reiterated government plans to introduce stricter rules for personal independence payments (Pips) and disability benefits cuts, which were announced last week.
Pips are given to those with disabilities or long-term health conditions to help with any extra living costs, and payments start at £72.65 per week.
Although the universal-credit standard allowance will increase from £92 per week to £106 by 2029-30, the health element will be cut for new claimants by 50% and then frozen. The OBR estimates the package will save £4.8bn in the welfare budget.
Reeves also referenced prior commitments to invest £1bn in helping people back into work and provide an additional £400m for the Department for Work and Pensions and job centres, both aimed at reducing the number of young people who are not in employment, education or training. “If we do nothing, we are writing off an entire generation,” she said.
However, Scope, a disability charity, criticised the cuts. Its director of strategy, James Taylor, said: “This move will further hit disabled people hard and drive even more into poverty. There has to be a better way of reforming welfare than moving from one set of knee-jerk proposals to another.”
Automating defence and the civil service
The chancellor also set out a £3.25bn “transformation fund”, including money for a voluntary exit scheme in the civil service, which she said will help the government use AI to modernise the state. The probation service will also receive new tech tooling.
But critics warn that tying AI to job cuts risks damaging the potential of the technology. “If AI adoption is framed as a tool for job losses, civil servants may be wary of using it,” says Mel Morris, the British entrepreneur and CEO of Corpora, an AI-research company. “AI should be positioned as an enhancement for expertise and not a replacement for it.”
Tying AI to the prospect of job cuts may also raise concerns among the broader public about the impact of the technology.
Markus Nispel, CTO of Extreme Networks, an IT networking company, welcomes the continued focus on AI. But what’s missing, he says, is the need to “ignite a national conversation about AI’s positive impact on society, showcasing tangible benefits that empower rather than replace people and livelihoods”.
“There’s an urgent need to build public trust,” Nispel adds. “To truly lead in AI and to close the gap with global leaders like the US and China, the UK must address the deep-seated anxieties surrounding AI, such as concerns over job displacement.”
Reeves also committed part of a £2.2bn increase to defence spending for weaponised drones and AI-powered warfare.
No new tax rises were announced by chancellor Rachel Reeves in Wednesday's spring statement. Instead, the government announced plans to cut welfare and benefits to plug holes in the public finances.
Reeves came to office promising only one major fiscal event per year, the autumn budget, with the spring statement being relegated to a financial update, meaning new taxes or major spending commitments were always unlikely.
But Prime Minister Kier Starmer’s commitment to increase defence spending to 2.5% of GDP by 2027 – three years earlier than planned – and revised forecasts from the Office of Budget Responsibility (OBR), put pressure on Reeves to find savings to meet her self-imposed fiscal rules.
