A chilly spring statement

A chilly spring statement

When Harold Macmillan, Britain’s prime minister from 1957 to 1963, was asked what he saw as the greatest challenge for a politician, he reputedly replied,  ‘Events, dear boy, events’.

• Those words might have occurred to Britain’s Chancellor of the Exchequer, Rachel Reeves, as she delivered her spring fiscal statement last week. The events of the last five months, since the October budget, have not been kind to the chancellor, or to the economy. GDP growth this year is now forecast to be just 1.0%, half the Office of Budget Responsibilities’ (OBR’s) October forecast, while borrowing costs are significantly higher.

• In the absence of changes to policy, a deteriorating economic environment – and its impact on public borrowing, receipts and spending - would have put the chancellor on course to break what she has called “non-negotiable” rules for limiting public debt. Instead, through a combination of cuts to sickness and disability benefits, reductions in government spending elsewhere and improvements in tax compliance, the chancellor has been able to restore the degree of fiscal headroom for meeting her targets to exactly the level, £9.9 billion, that she had pencilled in last October.

• Back in October headroom of £9.9bn looked extraordinary narrow and liable to be demolished by adverse shocks. In an economy where GDP runs at £3tn, with government spending around £1.35tn, a cushion of £9.9bn is hardly even a rounding error.

• For the chancellor to meet her fiscal targets growth needs to come in line with the OBR’s optimistic growth forecasts for the next four years. That, in turn, requires a marked improvement in productivity growth. Government borrowing costs also need to stay around current levels. A significant external shock would knock everything off course. The OBR, for instance, estimates that a global tariff war – one where countries effected by a 20% US tariff responded in kind – could reduce UK GDP by 1.0%.

• The UK is in an era of big government. Public expenditure is set to run at around 45% of GDP through this parliament, four percentage points higher than before the pandemic, and a level that has only been seen briefly, during recessions, since 1948. To finance this level of spending taxes are set to rise to 37.5% of GDP, the highest level since the late 1940s.

• Increased public spending will help, as is already being seen with the recent decline in hospital waiting lists. However, many areas of public services will remain under pressure, especially in so-called ‘unprotected’ departments such as justice, the Home Office and transport. Spending on these departments has been cut significantly in recent years and, according to the Resolution Foundation, they face further cuts averaging 4.5% in real spending per capita over the last four years of this Parliament.

• The chancellor’s plan for relatively modest savings of about £5bn on the welfare budget – which slow, but do not reverse, the rise in the cost of sickness and disability benefits – will, on the government’s own figures, result in 3.2m families losing an average of over £1,700 and quarter of a million more people falling into poverty.   

• Local government faces particular challenges. Since 2020 eight councils have issued section 114 notices, the local council equivalent of declaring bankruptcy. Public satisfaction with council services is at the lowest level since polling started in 2010. Yet the Resolution Foundation finds that resources allocated from central to local government will continue to decline.

• A more threatening global backdrop means that defence spending, which for years was shrinking, is on a rising path. Earlier this month the Financial Times’ Janan Ganesh wrote that Europe needed to “trim its welfare state to build a warfare state.” 

• Last November Ms Reeves said that the October budget, with its sizeable increases in taxation, borrowing and spending, had “wiped the late clean” for the public finances. The reality is that the OBR assigns a probability of just over 50% to the chancellor meeting her fiscal rules. That almost guarantees continued speculation about the risk of future tax rises, spending cuts and changes to the fiscal rules to allow more borrowing.

• The next major fiscal event will be in June, with the publication of the comprehensive spending review which will detail the allocation of funds between departments for the three years from 2026-27. This will be followed in the autumn with the budget, a crucial moment for assessing whether the Ms Reeves strategy is on track.  

• The UK corporate sector has responded to the uncertainties of recent years by strengthening its collective balance sheet, paying down debts and building up cash levels. In many respects the UK government has had to go in the opposite direction, raising borrowing and taxation, and running the public finances with a slim margin for error. Without consistent growth the public sector, and the public finances, will continue to struggle.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 0.1% at 8,659. 

Economics

• Estimates of business activity in March from surveys of purchasing managers indicated stronger growth in the US, UK and euro area, driven by the service sector. Manufacturing activity weakened across all three regions
• The German business climate improved in March, with a noticeable improvement in business expectations, according to the influential ifo survey. The ifo Institute commented “German businesses are hoping for a recovery”
• US president Donald Trump announced plans to impose an additional 25% import tariff from countries that buy oil from Venezuela, as well as 25% tariffs on US imports of motor vehicles and vehicle parts
• UK car manufacturers welcomed the UK government’s decision to not retaliate against US tariffs and advocated that the government should develop a “holistic approach” to aiding the UK auto industry, the FT reports
• US consumer confidence fell for the third consecutive month to its lowest level since February 2021, according to the Conference Board, amid fears of a slowdown of the US economy
• US consumer inflation expectations over the next 12 months increased sharply to 5%, according to the University of Michigan’s consumer confidence survey
• Retail investors have invested $67bn in US stocks so far this year, according to data provider VandaTrack, even as professional fund managers reduce their US equity exposure amid recent economic uncertainty
• The UK’s annual inflation rate softened more than expected in February to 2.8%, down from 3% in January
• Renting a one-bedroom flat is deemed unaffordable for newly qualified nurses and teachers in 45% of English local authorities, according to the charity Shelter

Business

• UK steel manufacturer British Steel launched a consultation process that may see the closure of its blast furnaces after failing to reach a deal with the UK government on moving to greener production methods
• Energy company Shell announced plans to cut spending on low carbon project by up to one third and increase its gas sales in a bit to boost profitability 
• Property developer Segro announced plans for a £1bn data centre in the UK as part of a joint venture with digital infrastructure organisation Pure Data Centres to support the rapid growth of AI
• International technology firm Vishay Inertechnology announced plans to invest £250m in developing the UK’s largest semiconductor manufacturing facility
• Electric vehicle manufacturer Tesla reported falling sales in Europe for the second consecutive month in February, amid increasing competition from Chinese rivals
• High street shops of the UK retailer WHSmith will be renamed to TG Jones following a £76mn sale of the stores to Modella Capital. The group is retaining travel stores in airports, railway stations and hospitals which will continue trade under the WHSmith name 
• Supermarket retailer Co-op announced more than £70m of investment to lower prices to match those of rival Aldi

Global and political developments

• Marine Le Pen faces the possibility of being banned from campaigning for office in a court judgement on corruption charges due today
• Potentially significant new US tariffs are due to take effect from Wednesday
• Donald Trump said he is "very angry" and "pissed off" with Vladimir Putin after weeks of attempting to negotiate a ceasefire in Ukraine. Mr Trump said he was angry with Putin for attacking Ukrainian President Volodymyr Zelensky's credibility, and threatened to impose tariffs on countries buying Russian oil if Putin does not agree to a ceasefire
• The US announced that Ukraine and Russia have agreed to a ceasefire in the Black Sea. Ukraine said it would immediately comply; however Russia said it would require further conditions before enacting the ceasefire
• Ukrainian president Volodymyr Zelenskyy announced that Ukraine has agreed new intelligence sharing deals with European nations. Zelenskyy also confirmed Ukraine has received a new US proposal for a critical minerals deal
• Donald Trump re-iterated his comments that the US needed to control Greenland for international security reasons, as US vice-president JD Vance visited a US military base on the island
• Canadian prime minister Mark Carney and Donald Trump agreed to “begin comprehensive negotiations” between the two countries amid a recent escalation of trade tensions
• UK emissions fell 4% in 2024 due to reduced coal and gas usage, according to the Department for Energy, Security and Net Zero
• The UK could meet half of its projected oil and gas demand using domestic output, reducing its energy dependency from abroad, according to industry body Offshore Energies UK, provided that “the right business conditions” were in place

And finally… a miniature dachshund has been sighted 16 months after escaping while on holiday to Australia’s Kangaroo Island. Officials are working to return Valerie the sausage dog to her owners after being spotted wandering the island in good health – dasch-found