"The effects of tax increases at the Autumn Budget and growing geopolitical fissures have led the OBR to sharply downgrade its growth projections for 2025 to 1%, from 2% just six months ago. Longer term, the OBR continues to be more optimistic than other forecasters, particularly on the pace of productivity growth. If that assumption was also to be revised, meeting current fiscal goals could prove extremely challenging.
“The low level of fiscal headroom ahead of the Spring Statement meant that the Chancellor had to adjust spending plans to avoid breaching fiscal rules that had been put in place in the Autumn Budget. The fiscal position has seen a steady deterioration since October last year, with overall borrowing for 2024/25 now expected to reach £137.3bn. Changes to growth prospects and inflation meant that the current deficit in 2029/30 deteriorated by £14bn, which would have failed the fiscal rule before policy adjustments.
“The revised level of headroom remains small by historic standards, which may lead to more fine-tuning in future. The OBR again projects £9.9bn of headroom against the Government’s fiscal mandate of balancing the current deficit by 2029/30. The OBR reports that a relatively modest worsening of the outlook such as a 0.6% increase in the cost of Government borrowing could lead the Chancellor to fail to meet her target.
“The updated forecast imposes a tighter limit on departmental budgets at the upcoming spending review. Unprotected departments in areas outside of health, defence and aid now face a potential real-terms cut of 0.8% per year from 2026/27. To the extent that cuts to some departmental budgets may not be feasible, this could require a top-up at future budgets through a potential increase to taxation.”
