Spring statement: Rachel Reeves announces deep cuts to welfare and public services
Richard Partington
Rachel Reeves blamed “global uncertainty” as she announced swingeing cuts to welfare and other public spending designed to plug a fiscal hole caused by soaring borrowing costs and sluggish economic growth.
The chancellor told the Commons that the UK’s growth forecasts for this year had been halved from 2% to 1% by the Treasury watchdog, which concluded that the chancellor would have missed her goal of balancing the books if she did not act.
Striking a defiant tone, Reeves set out measures in her spring statement she said would turn a predicted £4.1bn hole in the public finances back into a £9.9bn surplus within five years. This would restore “in full” the headroom against her self-imposed fiscal rules, she said.
In a pointed message to her cabinet colleagues and Labour backbenchers who have privately argued for the fiscal rules to be revisited, Reeves said they were “non-negotiable” and “an embodiment of this government’s unwavering commitment to bring stability to our economy”.
The chancellor said the cuts she announced would be offset by billions of pounds in long-term investment to grow the economy, with a particular focus on the building of millions of new homes and supporting higher spending on defence.
UK public's inflation expectations highest since October 2022
The British public’s expectations for inflation over the longer term have risen this month to their highest since October 2022, new data shows.
A Citi/YouGov survey shows that the public’s longer-term inflation expectations have risen to 4.2% in March, from 3.9% in February. That’s the highest since the recent peak of inflation, when surging energy costs were driving up the cost of living.
Year-ahead inflation expectations rose to their highest since October 2023 at 4.0%, up from 3.9%.
Citi economists Callum McLaren-Stewart and MichelNies explain:
“For the (Bank of England) MPC, this survey will warrant continued caution with quarterly cuts the likely outcome for now.”
Uk supermarket chain Morrisons has reported rising sales in the three months to January.
The grocery giant said sales were 2.4% up over the quarter to January 26, hitting £4 billion, despite having announced hundreds of people are at risk of redundancy earlier this week.
The company said it made £56m in savings during the period and hiked its long-term savings target from £700m to £1bn.
Rami Baitiéh, chief executive, says:
“Despite a challenging environment, Morrisons has made exceptional progress in a very short time and that is entirely down to the hard work, positivity, talent and customer focus of the colleagues in our stores, in our foodmaking sites and in our operations across the country.”
Former chancellor George Osborne has told Bloomberg that today’s spring statement needs to be “a reset”.
Osborne was speaking in Hong Kong, at a summit organised by HSBC, where he says there is “quite a negative sentiment about the UK”, which needs to be changed.
Osborne argues that the government has not, until quite recently, given an “unabashedly pro-business or pro-enterprise” message. Instead it has been raising taxes on business and pushing entrepreneurial, wealthy people away, he adds.
This morning’s UK February inflation report was a welcome gift to doves at the Bank of England, reports AchilleasGeorgolopoulos, senior market analyst at XM.
Both the headline and core inflation figures decelerated to 2.8% and 3.5%, respectively, bringing smiles to the BoE halls and supporting the chances of a May rate cut.
The pound has not taken lightly the lower inflation prints, though, losing ground against both the euro and the dollar.
Photograph: XM
Earlier this month the most dovish policymaker at the Bank, SwatiDhingta, was the only member of the Monetary Policy Committee to vote for a rate cut – her eight colleagues voted to leave rates on hold.
The focus now shifts to the spring statement update, Georgolopoulos adds:
Rachel Reeves is expected to avoid changing her fiscal rule and increasing taxes, and instead focus on spending cuts.
Reports point to significant cuts in welfare spending and a leaner public sector, which sounds similar to what Musk’s DOGE is implementing in the US. These new measures will probably be begrudgingly accepted by the majority of voters and most Labour MPs, who are already upset about the fiscal policy mix implemented by the Labour government.
Today’s inflation data is consistent with the Bank of England cutting by a further 25bps at May’s meeting, says Gabriella Dickens, G7 economist at AXA Investment Manager.
Dickens points out, though, that we will see another CPI print (for March) before then.
She tells clients:
CPI inflation will tick up over the coming months, peaking at around 3.5% in Q3.
Underlying pressures, though, should continue to ease, albeit with some volatility.
We continue to see three 25bps cuts this year leaving Bank Rate at 3.75% by year end.
There isn’t consensus on what the Bank of England will decide to do this year.
The. National Institute of Economic and Social Research (NIESR) predict it will only manage one more interest rate cut this year.
Monica George Michail, NIESR associate economist, explains:
We forecast CPI inflation to remain above the Bank of England’s 2 per cent target throughout this year, driven by increased public spending, persistent wage growth and global trade fragmentation.
We therefore think there will only be one more 25 basis point interest rate cut in 2025”.
⚡ OUT NOW ⚡
Our latest CPI Tracker expects #inflation to remain above 2% target in 2025, meaning only one further rate cut this year 📈
This is due to increased public spending, persistent wage growth and global trade fragmentation 📊
Profits at the UK housebuilder Vistry Group have slumped by more than a third in what it described as a “disappointing year” but it is pinning hopes of a turnaround on the government’s promise this week to inject £2bn into affordable homes.
After three profit warnings last year, Vistry suspended dividend payouts to shareholders on Wednesday and its shares were the biggest faller on the FTSE 250 index, dropping by as much as 8% before easing back to 5.5% down.
Greg Fitzgerald, Vistry’s chief executive, said 2024 had been challenging but welcomed the government’s affordable housing pledge, adding the builder would “be seeking to progress as quickly as possible with our partners to deliver quality new homes across the country”.
