Chancellor Rachel Reeves today delivered a Spring Statement designed to bolster the UK’s economic and national security at a time of heightened geopolitical tension, due to war in Ukraine, global economic uncertainty, rising borrowing costs for many countries, unstable trading patterns and tariffs.
The Labour government intends “to provide security for working people and to deliver a decade of national renewal”, she said.
The two key pillars of her statement were restoring stability to the public finances and making the UK “a defence industrial superpower”.
The fiscal rules are non-negotiable
The Labour government is on track to meet both of its fiscal rules – the stability rule and investment rule – two years early, Reeves said, declaring these rules “non-negotiable”.
The stability rule involves balancing the budget by 2029-30 so day-to-day spending is met by tax receipts. Reeves now expects to achieve a budgetary surplus by 2027-28. “That means we are continuing to meet the stability rule two years early, building resilience to shocks in this more uncertain world,” she said.
The investment rule to drive economic growth has a goal of reducing net debt by the end of the forecast period in 2029-30. Net debt should start falling in the 2027-28 financial year, according to the Office for Budget Responsibility’s (OBR) forecasts.
“After the last government doubled the national debt, debt interest payments now stand at £105.2bn this year. That is more than we allocate to defence, the home office and the Ministry of Justice combined,” Reeves said.
“The responsible choice is to reduce our levels of debt and borrowing in the years ahead so that we can spend more on the priorities of working people.”
Putting defence at the heart of the UK’s industrial strategy
Last month, prime minister Keir Starmer unveiled a plan to increase the UK’s defence spending to 2.5% of GDP, funded by reducing overseas development assistance from 0.5% to 0.3% of gross national income.
Reeves confirmed this will take place, providing an additional £2.2bn in spending for the Ministry of Defence (MoD) next year – the largest sustained increase since the Cold War – and laying out further details on what this will look like in the short term.
Defence is one of the eight priority sectors in the government’s Industrial Strategy, with the MoD expected to detail later this year how the defence sector will be transformed into “an engine for growth” for the country.
In the Spring Statement, Reeves said: “We will spend a minimum of 10% of the Ministry of Defence’s equipment budget on new novel technologies, including drones and AI-enabled technology, driving forward advanced manufacturing production in places like Glasgow, in Derby and in Newport, creating demand for highly skilled engineers and scientists and delivering new business opportunities for UK tech firms and startups.
“We will establish a protected budget of £400m within the Ministry of Defence, a budget that will rise over time for UK defence innovation with a clear mandate to bring innovative technology to the front line at speed.”
Growth forecasts have been slashed for this year but should improve thereafter
As feared, the OBR has halved its growth forecast this year from 2% to 1%. “The economic and fiscal outlook has become more challenging since the autumn budget,” the watchdog said.
While the OBR was more optimistic on growth than the Bank of England, it explained that structural weaknesses in the UK economy, along with crystalising geopolitical tensions, have negatively impacted growth.
Although the OBR conceded that planning reforms would deliver a “modest boost” to the level of potential output by 2029, cumulative growth for 2023-2029 is expected to be half a percentage point lower than October predictions.
However, while the forecast for the year has decreased, predictions for the rest of the decade have risen, with the OBR expecting the growth to average 1.75% until 2030. Reeves said this means the economy will be larger at the end of the forecasted period than initially expected.
The average household should be £500 better off
Household disposable income is forecast to climb by an average of 1.5% each year, which will make families around £500 a year better off by 2030, the OBR said. However, the growth in household disposal income is projected to vary significantly around this average, the OBR warned, “first slowing sharply from 2.5% in 2024-25 to almost no growth in 2027-28”.
News this morning that UK CPI inflation fell to 2.8% in February, down from 3% in January, provided another bright point for household finances.