When the new UK Labour government assumed office in July last year, they heralded a move to greater fiscal stability and certainty, underpinned by one fiscal event per annum and a Spending Review every two years. This would, they claimed, provide the certainty public bodies and devolved governments craved, allowing them to plan accordingly.
The Spring Statement was pencilled in as a fiscal spring cleaning exercise, updating Parliament and the wider public about the latest economic outlook (underpinned, of course, by Office for Budget Responsibility (OBR) forecasts).
Although this was not a Budget (in the sense of setting firm tax and spending plans) it did signpost significant budgetary tweaks required to adjust to what the Chancellor described as a world “changing before our eyes.” These global and domestic changes have resulted in the OBR altering its forecasts for the public finances. In response to this, the UK Government has taken measures to meet its self-imposed fiscal rules by £9.9 billion by the end of 2029-30. This is the exact same headroom as in the Autumn Budget 2024, and is extremely small by historic standards. Responding to this Statement, Paul Johnson of the IFS said:
“…if you are going to have “iron-clad” fiscal rules then leaving yourself next to no headroom against them leaves you at the mercy of events. Ms Reeves has left herself with the same £9.9 billion sliver of headroom against her target to balance the current budget as she had in October, and a very similar amount of headroom against the target that debt should be falling in 2029–30 (£15.1 billion, down from £15.7 billion in October). All of that adds to uncertainty around policy. We can surely now expect 6 or 7 months of speculation about what taxes might or might not be increased in the autumn. There is a cost, both economic and political, to that uncertainty. The government will suffer the political cost. We will suffer the economic cost.”
OBR economic forecasts – growth downgraded for this year before picking up
The economic and fiscal outlook has become more challenging since the Autumn 2024 Budget, with stagnant growth and lower business and consumer confidence. Energy prices have risen again, and the cost of government borrowing has increased. The global outlook has also become more uncertain with geopolitical risks arising from the trade and security policies of the new US administration.
The OBR has halved the economic growth forecast for 2025 since its previous Economic and Fiscal Outlook, now forecasting the UK economy will grow by 1 per cent this year (compared with a forecast of 2 per cent in October 2024). However, growth is then expected to recover from 2026, growing on average by around 1.75 per cent for the rest of the decade.
Scottish Budgetary impacts
Although details won’t be clearer until the Spending Review in June, the Scottish Budget is impacted by UK government departmental allocations. The impact will depend on which departments are affected by spending changes, with changes in spending in devolved areas such as health and education having implications for the Scottish budget. Changes to spending in reserved areas do not directly impact the Scottish budget.
The 2025-26 Scottish Budget will receive an additional £28 million in Barnett consequentials. Impacts for years beyond 2025-26 remain uncertain, but cuts have been pencilled in by the UK Government in devolved benefits.
Welfare cuts were heavily trailed in advance of the statement and will mean the block grant adjustment (BGA) added to the Scottish Budget will be reduced. If the Scottish Government wishes to retain its existing and more generous Scottish social security budget, additional money will be required from other parts of the budget. Details around the proposed social security changes are presented in a recent SPICe blog. The OBR policy measures costings point to reductions in the Scottish Social Security BGA from Personal Independence Payment (PIP) changes of £177 million in 2027-28 rising to £455 million in 2029-30.
Defence spending does not result in Barnett consequentials for the Scottish budget, so increases in defence spending do not result in additional funding for the Scottish Government. However, much of this increase is to be funded by reducing the international development budget (another reserved area). The areas in which additional defence resources are spent may also impact Scotland’s economy, for example, if additional sums are spent on defence technologies based in Scotland.
Ross Burnside, Senior Researcher, Financial Scrutiny Unit (FSU)