What to expect from the 2025 Spring Statement

When Chancellor Rachel Reeves revealed plans to hold one major fiscal event a year instead of two, it drew little resistance.

Tax-hiking speculation before Labour’s first Budget in 14 years sent the rumour mill into a frenzy. A repeat in the lead-up to this year’s Spring Statement, set for two weeks’ time on 26 March, was best avoided.

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In the Treasury’s words, the move to a single annual budget will give “families and businesses stability and certainty on upcoming tax and spending changes and, in turn, support the government’s growth mission”.

The chancellor’s intention to roll out a routine affair later this month - where we assume this will involve presenting the Office for Budget Responsibility’s (OBR) economic and fiscal forecasts to the Commons – have been plunged into doubt.

According to experts, a cocktail of factors, both domestic and global, might force Reeves to act.

“The spring forecast could turn out to be far more consequential than the non-event it was first billed as,” said Bee Boileau, research economist at the Institute for Fiscal Studies (IFS).

Tax hikes versus austerity

In the past few months, things haven’t exactly gone as intended.

Reeves is reportedly at risk of failing to meet her self-imposed fiscal targets that were set in October. If this transpires, the chancellor will have some tough decisions to make, potentially forced to row back on her desire to leave fiscal policy alone.

Economists have warned that a combination of sluggish UK growth, swelling global borrowing costs, and higher interest rates may have wiped out Reeves’ narrow £9.9 billion headroom.

To restore order may require Reeves to hike taxes, cut spending or adjust her own supposedly iron-clad fiscal rules.

There is a fourth option. The chancellor could do nothing and keep her fingers crossed that the situation corrects itself over the coming months. None of these four routes are palatable. There are huge risks at stake.

Boileau warned it would be difficult for Reeves to present the world and markets with figures that show her non-negotiable fiscal rules have been broken, “and doing so would also lead to months of speculation about what taxes would be raised in the Autumn Budget”.

Boileau added: “If she prioritises the fiscal rules and breaks her commitment to a single annual fiscal event then she faces a stark choice between her promise not to come back with a further round of tax rises and her promise of no return to austerity.”

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So, what are Reeves’ fiscal rules? There are several components. The main one, known as the stability rule, requires that all day-to-day government spending is fully funded by tax revenues by 2029–30. Alongside this there’s an investment rule where net financial debt should fall as a share of the economy, and a welfare cap, which imposes a limit on what the government can spend on certain benefits and tax credits.

It seems spending cuts, specifically to welfare, could be on the cards later this month, but this would not be popular in all quarters. It may face backlash from Labour backbenchers, already irked by the decision to means-test winter fuel payments.

Hannah Peaker, deputy chief executive at the New Economics Foundation, a think tank, was critical of the prospect. “Trailed cuts to welfare will mean an even bigger squeeze on living standards for the poorest, undermining the government’s growth mission and flying in the face of their child poverty strategy,” she said.

Cash ISAs under the microscope

It’s no secret that the UK economy desperately needs a shot in the arm.

After cutting interest rates in early February, the Bank of England downgraded its 2025 growth forecast for the UK from 1.5% to 0.75%. With inflation now anticipated to remain elevated for longer, the path of rate cuts might be slower than expected. According to the Bank’s forecasts, the consumer prices index (CPI) may not return to the 2% target until 2027.

Incidents during the dawn of Trump’s return to the White House and the ongoing conflict between Russia and Ukraine pose further threats to our economy.

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The government is weighing up several options to get things moving, with the latest reports homing in on the individual savings account (ISA) landscape – specifically whether the Cash ISA allowance will be cut to encourage more flows into the stocks and shares version. Proponents claim this will help to boost the economy and improve saver returns.

Will we learn more about what the government might do later this month? It’s possible, but reducing part of the ISA allowance is a big call to make.

If taxes do rise, what might we see?

Keir Starmer was recently quizzed about the Spring Statement, notably the likelihood of tax hikes and spending cuts. The prime minister stopped short of ruling them out, just like he did when asked the same question in December, but was non-committal, as you would expect.

He did continue to toe the party line by stressing the big decisions were made last autumn, so it seems even if Reeves overshoots her fiscal rules, tax rises are a last resort.

Should the government feel it has no option other than to turn the spring forecast into a major fiscal event, after proposing £40 billion in tax increases just a few months ago, its options are thin.

We must also remember that Labour has vowed not to raise taxes on working people for the duration of this parliament. Reeves could, of course, break this promise. Her credibility, however, would take a hit.

In the instance hikes are needed, the obvious route is to extend the freeze on income tax thresholds. These have remained static since 2021 and won’t budge until 2029. Prolonging fiscal drag, as it’s known, by two extra years could raise around £20 billion in total, according to IFS sums, as rising incomes will trip more people into higher tax thresholds.

This would allow Reeves to avoid jacking up the headline rates of income tax or employee national insurance (NI), keeping her manifesto promise. However, given the chancellor just a few months ago committed to end the freeze on tax rates in 2029, it would mark an abrupt about-face.

I think it’s safe to say that, whatever happens, businesses will be left alone. Many firms are steeling themselves for April’s national insurance (NI) reforms, after already stumping up more in corporation tax since spring 2023. According to some retailers, the only way to navigate these increases is to cut jobs and raise prices. The latter may exacerbate the UK’s inflationary pressures.

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Elsewhere, a further raid of inheritance tax (IHT) is an outside possibility, namely toughening up the gifting regime. Under current potentially exempt transfer rules, any money or asset you give away becomes IHT free provided you survive seven years. Reports say the government could extend the time frame to 10 years.

The sticking point here is that such a move is unlikely to generate much in tax revenues by 2029. Moreover, the government may choose to tread carefully around IHT for the time being. While IHT receipts are small fry compared to other taxes, they’re rising sharply. Not to mention it’s a highly emotive tax, as the ongoing opposition to last year’s proposed reforms to pensions, farms and businesses emphatically underlines.

Labour is already under mounting pressure from the rural community and pension providers to seek alternatives to what was put forward in October. Extending the seven-year rule, particularly as lifetime gifts are one of the few tactics available to soften the impact of the forthcoming reforms, is another policy that wouldn’t go down well.

In summary, the Spring Statement looks certain to be more significant than originally planned. Reeves will be hoping the numbers are favourable, taking some awkward decisions out of the equation. If that happens, most will let out a huge sigh of relief, none more so than the chancellor herself.