The Office for Budget Responsibility’s (OBR) update, the Chancellor’s response, and what comes next.
The Chancellor Rt Hon Rachel Reeves MP delivered the Spring Statement on 26 March, responding to the latest Office for Budget Responsibility (OBR) fiscal and economic update. As expected, the OBR downgraded its growth forecast for this year to 1.0% (down from 2.0% forecast before the Autumn Budget) and the Chancellor responded by announcing a series of spending changes designed to modernise public services, reform welfare, and meet her non-negotiable fiscal rules.
Importantly, the Chancellor backed up her commitment made at our Annual Conference in November not to raise the business burden further. Members are already facing a difficult few months with the National Insurance Contributions (NICs) and National Living Wage increases to come on 1 April, and further work is required to find an appropriate landing zone for the Employment Rights Bill to mitigate additional costs to business.
Needing to go further and faster on growth in a changing world, the Chancellor announced several defence, housing and planning measures that she hopes will support the government’s central mission to kickstart growth.
Below, the CBI provides all the key details you need to know as we look ahead to the next set piece moment for HM Treasury – the Spending Review on 11 June.
The OBR’s economic and fiscal update
Since the turn of the year, the Chancellor had been under increasing pressure to meet her non-negotiable fiscal rules, with both international and domestic events squeezing the £9.9bn of fiscal headroom set following the Autumn Budget. The OBR’s latest economic and fiscal update, published alongside the Spring Statement, confirmed the Chancellor was now facing a deficit of £4.1bn in FY29/30, the result of higher debt interest payments and weaker-than-expected tax receipts.
The news on short-term growth was no more positive for the Chancellor, with the OBR halving its growth forecast for 2025 from 2.0% to 1.0%. One-third of the lower growth this year reflects what appears to be structural weaknesses, concentrated in productivity challenges, whilst two-thirds is due to what appear to be cyclical factors, including higher interest rate expectations, increases in gas prices, and elevated uncertainty. Longer term, the news was more positive, with real GDP growth upgraded from 1.8% to 1.9% in 2026, from 1.5% to 1.8% in 2027, from 1.5% to 1.7% in 2028 and from 1.6% to 1.8% in 2029.
Annual CPI inflation is forecast to rise to 3.2% in 2025, 0.6% higher than the forecast in October. From 2026 onwards, the OBR expects CBI inflation to fall rapidly back to around the Bank of England’s 2.0% target as energy prices drop, food price inflation falls, and wage growth eases back from current elevated rates. On employment, the OBR expects the unemployment rate to peak at 4.5% in 2025, before falling back to its estimated structural rate of 4.1% in 2028.
The Chancellor's response
At risk of breaking her fiscal rules, the Chancellor announced a series of spending changes designed to drive efficiencies through the modernisation of public services and welfare reform. Defence, housing, and planning announcements were also made to go further and faster on growth.
The Chancellor reaffirmed her pledge at the CBI’s Annual Conference last year to not impose further tax hikes on businesses.
The policy changes announced by the Chancellor are forecast to raise £14.0bn in FY29/30 - offsetting the underlying deterioration in the Chancellor’s fiscal headroom seen since October.
Modernising public services
The Chancellor confirmed plans to cut the government’s running costs by 15% by the end of this parliament, with this ambition to be supported by a new £3.25bn Transformation Fund. This will support the fundamental reform of public services, seize the opportunities of digital technology and artificial intelligence (AI), and transform frontline delivery to release savings for the taxpayer over the long term.
Reforming welfare
Welfare cuts presented in the ‘Pathways to Work: Reforming Benefits and Support to Get Britain Working’ Green Paper, including a tightening of eligibility criteria for Personal Independence Payments (PIP), were widened in response to the OBR suggesting that the reforms would save £1.6bn less than planned. The Universal Credit Health element will be cut by 50% and then frozen for new claimants.
Boosting defence expenditure and innovation
In a changing world, the Chancellor sought to seize the growth opportunities attached to the UK’s defence industry. An additional £2.2bn of defence spending was announced for FY25/26, whilst defence innovation will be backed through £400mn of ringfenced funding for UK Defence Innovation. UK Export Finance’s Direct Lending capacity for exports has been increased by an additional £2bn, whilst at least 10% of the Ministry of Defence’s equipment and procurement spend will go on novel technologies from FY25/26.
Delivering affordable housing and addressing construction skills shortages
As a downpayment on the government’s ambition to build 1.5mn homes by the end of the parliament, the Chancellor announced a £2bn investment that will deliver 18,000 social and affordable homes. Importantly, alongside providing funding needed to boost housing delivery, the government will be providing £625mn to train up to 60,000 more construction workers required to help the government meet its 1.5 million homes target.
In positive news for the Chancellor, the OBR has concluded that the government’s planning reforms will permanently increase the level of real GDP by 0.2% in FY29/30 - an additional £6.8bn for the economy. The OBR also concluded that the planning changes announced will likely deliver 1.3mn homes over the next five years, close to the manifesto promise of 1.5mn within this parliament.
Tax
Two consultations were launched to provide more certainty in tax treatment for business investment, a key pillar in the CBI’s Business Tax Roadmap. The consultation on advanced tax certainty for major projects will focus on the largest investments, including those of national and strategic importance. The consultation on R&D tax relief advance assurances will consider eligibility, use of voluntary and mandatory assurances, and the stage of R&D activity, ensuring certainty of tax credit payments paid out by HMRC.
Working with members, the CBI will submit a written representation on business rates reform later this month. The government announced it will release an interim report this summer, with further details expected in the Autumn Budget, including confirmation of the new multiplier rates.
HMRC will recruit 500 more compliance staff, on top of the extra 5,000 announced last year, raising concerns of increased investigations on businesses. The CBI’s Spending Review submission urges HMRC to use part of these resources for proactive business support, including faster VAT agreements, Advanced Pricing Agreements, and R&D tax credit processing.
Market reaction
Financial markets recorded a subdued reaction to the Chancellor’s Spring Statement. As of 3pm on 26 March, the pound stood at $1.29 against the US dollar and €1.20 against the euro. The lower-than-expected CPI inflation announced on 26 March led to a slight depreciation of the pound against both the dollar and euro. But more broadly, the pound remained largely stable through the day, including when the Chancellor was delivering her statement.
Gilt yields had been rising in the weeks leading up to the Spring Statement, reflecting uncertainty over global trade policy (impacting yields in other advanced economies too), and outturn data suggesting that UK growth was underperforming expectations and tax receipts were coming in below forecast. Yields initially jumped in response to the OBR halving its GDP growth forecast for 2025 (from 2.0% to 1.0%) but then retreated as it was revealed that growth performance was revised up in later years. By 3pm, 2-year gilt yields stood at 4.36% (+0.06pp) whereas longer dated gilts had fallen, with the 10-year standing at 4.72% (-0.04pp) and the 30-year at 5.31% (-0.06pp), respectively.
UK equity markets have responded positively, albeit mutedly, to the Statement. Both the FTSE 100 and 250 opened higher on the morning of the statement, although this may reflect the better-than-expected CPI inflation numbers and a strong performance in US equities the day before. The FTSE 100 – which is dominated by internationally oriented firms and performs better as the pound depreciates against the dollar - gained 0.5% in value by 3pm. The more domestically oriented FTSE 250 posted a 0.4% gain. Similarly, the FTSE AIM 100 (an index of smaller listed companies) rose 0.3%.
What comes next
The CBI’s attention now turns to the forthcoming Spending Review due to conclude on 11 June. With the ten-year infrastructure strategy and Industrial Strategy also due alongside the Spending Review, the next few months will be focused on making the case for our Spending Review asks. We will also be engaging government on the importance of an appropriate landing zone for the Employment Rights Bill, ensuring it avoids placing significant regulatory burden on businesses, to the detriment of the government’s growth ambitions.
