Understanding the Spring 2025 Budget: Key Insights and Implications
The Chancellor, Rachel Reeves, presented the Spring 2025 Financial Update to Parliament on 26 March 2025. It included updates on public spending, policy decisions, and forecasts from the Office for Budget Responsibility (OBR) for the UK economy and public finances. The briefing gave MPs detailed insights into the economic and fiscal outlook, policy measures, and implications.
Summary
The Spring Statement 2025 was smaller than the 2024 Autumn Budget, focusing on adjustments to spending plans and policy measures to meet fiscal rules amidst global uncertainties. The OBR forecasts for GDP growth, inflation, household incomes, unemployment, investment, and long-term growth were updated, reflecting significant changes and risks. The Chancellor introduced new fiscal rules, and the OBR assessed the economy against these rules, highlighting the probability of meeting targets. Key policy announcements included changes to welfare, defence spending, housing and construction, and measures to recover more tax.
Bullet Points
- Public Spending:
- Short-term spending increases, long-term decreases: Spending decisions announced since the 2024 Autumn Budget, including those in the 2025 Spring Statement, will increase spending in the short term but decrease later.
- Adjustments to departmental budgets: The Chancellor has reduced day-to-day (resource) spending in the later years of the forecast but increased investment (capital) spending.
- Defence spending: Defence spending will rise to 2.5% of GDP by 2027, funded by cuts to overseas aid. This shift results in lower day-to-day spending and higher investment spending.
- Welfare spending reforms: Changes to the welfare system, including reductions in disability benefits and adjustments to Universal Credit, will reduce overall spending by £4.8 billion by 2029/30.
- Policy Decisions:
- Welfare reforms: The government published a green paper on 18 March 2025, announcing proposals to reform disability-related benefits, prevent long-term economic inactivity, improve employment support, and ensure the benefits system is financially sustainable.
- Defence budget uplift: The Spring Statement included a £2.2 billion uplift to the Ministry of Defence budget in 2025/26, with commitments to spend on uncrewed and autonomous systems and AI-enabled capabilities.
- Housing and construction: £2 billion allocated for building social and affordable homes in 2026/27, along with a £625 million investment in construction industry skills programmes to expand training routes and support employers.
- Tax recovery measures: Measures to recover more tax, including investing additional capacity for debt management at HM Revenue and Customs, more compliance staff, and increasing late-payment penalties for VAT and income tax self-assessment taxpayers.
- OBR Forecasts for the Economy:
- GDP growth: The OBR halved its forecast for GDP growth in 2025 from 2.0% to 1.0%, with slight increases in subsequent years due to lower interest rates and energy prices.
- Inflation: Inflation is expected to peak at 3.8% in July 2025, easing to 2.0% by Q2 2026, driven by faster-than-expected rises in energy and food prices.
- Living standards: There will be a Modest rise in living standards, with slower growth in real household disposable income due to lower real wage growth, higher taxes, and slower growth in benefits.
- Unemployment: The unemployment rate is expected to peak at 4.5% in 2025 before gradually falling to 4.1% by the end of 2027.
- Investment: Business investment growth was revised for 2025, but it is expected to recover in subsequent years, increasing by 1.5% and 1.8% annually from 2026 to 2029.
- Long-term growth: The OBR’s expected long-term growth rate in potential output is slightly higher, rising to around 1.8% per year by 2029, with productivity growth recovering to 1.3% per year by 2029.
- OBR Forecasts for Public Finances:
- Government borrowing: Government borrowing is forecast to increase to £137 billion in 2024/25 and then fall to £74 billion by 2029/30. Borrowing would have been higher without the Chancellor’s policy announcements.
- Government debt: Government debt is forecast to rise to 95.9% of GDP in 2024/25 and then stabilise around 96% by 2029/30. This level of debt has not been consistently above 90% of GDP since the early 1960s.
- Current budget rule: The current budget must be in surplus by 2029/30, with a forecast margin of 0.3% of GDP (£9.9 billion) and a probability of 54% of meeting the target.
- Public sector net financial liabilities rule: Public sector net financial liabilities should be falling as a share of GDP by 2029/30, with a forecast margin of 0.4% of GDP (£15.1 billion) and a probability of 51% of meeting the target.
The Commons briefing document provides a comprehensive overview of the Spring Statement 2025, highlighting key changes in public spending, policy decisions, and economic forecasts and their implications for the UK’s fiscal targets and public finances. The briefing underscores the challenges and uncertainties facing the UK economy and the government’s efforts to navigate these through strategic policy adjustments and fiscal management. A copy of the briefing is available here.