Spring statement 2026 - macro perspective

The art of saying nothing very loudly

If Chancellor Reeves had one eye on the forthcoming May local elections, she had both hands tied behind her back by her commitment to only one "fiscal event" a year (in the autumn) and by the unfolding further conflict in the Middle East. New OBR forecasts showed her comfortably meeting her fiscal rules, but their underlying assumptions may get tested if the conflict becomes prolonged or escalates. So, while she used her Spring Statement to rehearse recent achievements, she kept dry the new powder she accumulated from better tax receipts and lower debt interest payments. As she spoke, financial markets were not distracted from their laser focus on events in the Middle East. Ms Reeves may have taken that as a loud endorsement of her performance.

Outlook/macro assessment 

The Spring Statement could have been very different. The OBR forecasts showed not only that the Chancellor had comfortably met her fiscal rules but had done so with potentially greater room to manoeuvre after better-than-expected tax receipts and lower debt interest payments (see our Background and Run Up to the Day section later in this article). 

As it turned out, events in the Middle East - which will have unfolded after the OBR forecasts were finalised and sent to the Chancellor - reinforced the need to keep her powder dry ahead of the Autumn Budget. 

Those events - beyond their human tragedy - also put flags down against a number of the OBR forecast assumptions which could prove vulnerable if the conflict becomes protracted or escalates: revisions that were made this time to growth, debt interest costs, financial market forecasts and tax receipts could all be reversed or deepened in an unhelpful way for her Budget arithmetic. 

But if that risk does materialise, she has a couple of procedural devices that may work in her favour before she has to confront the tax, borrow, cut trifecta again. One that is already underway is the transition from a 5-year fixed to a 3-year rolling term in which to demonstrate compliance with the fiscal rules. 

While that should limit the opportunity for gaming the system once the transition is complete, it creates something of a cliff-edge in the short-term: when Labour took office the 5-year window required compliance by tax year 2029/30. With the transition now underway, at the 2027 Budget the compliance deadline moves out one year to 2030/31 ... a year or so after the next General Election. 

On the day 

Market response 

By any definition of dull, Chancellor Reeves managed to achieve it - and quickly - as far as financial market reaction to her Spring Statement was concerned. Her speech was unusually short - at 25 minutes - for a set piece from the Treasury front bench during which time UK equity, gilt and currency markets moved (or stood still) in lock step with their international counterparts. 

Understandably, as she spoke those markets were far more preoccupied with events unfolding in the Middle East, which may raise a number of questions to be answered in her Autumn Budget - or may come to haunt her in the meantime. 

Macro features 

Individually, such revisions as were made by the OBR were largely as anticipated. But taken together, and especially in the context of the recent and sudden energy price and other shocks from the escalation of military action against Iran, they may be pointers to areas of vulnerability for the Chancellor in her preparation for the Autumn Budget.

GDP growth was cut for this year to 1.1% (from 1.4%) but that's still higher than the Bank of England forecast (0.9%) and even so leaves the UK economy 0.3% smaller overall in 2030 than the OBR had forecast in its November outlook. Each of those numbers could be vulnerable to events in the Middle East.  

Expected growth in business investment has been cut both this year and next, offset by a bigger increase in government investment this year - but that looks like a 'bringing forward' from subsequent years whose forecast growth rates have all been cut. 

Debt interest is forecast to be some £17bn lower across the whole forecast period. That is, of course, testament to a more benign set of circumstances in the run up to the OBR forecasts, but also represents significant vulnerability should interests rates and debt stock rise as a consequence of events in the Middle East.

But among the determinants of the OBR's fiscal forecast, perhaps the greatest vulnerability lies in their assumptions about equity and oil prices: they increased the former (by 8%) and decreased the latter (by around $2 a barrel) for all forecast years. 

On the other side of the National Accounts ledger, the OBR increased its forecast receipts from income tax driven by increases in Self-Assessment big enough to more than offset its downgrades to PAYE receipts. If the Middle East conflict is prolonged and/ or escalates, the additional £12bn it is forecasting for self-assessment to 2030/31 could fall far short and make a material dent in the headroom the Chancellor created in November. 

The self-avowed litmus test for the Chancellor's policy mix is her compliance (or otherwise) with her fiscal rules.  Here the overall impact of the changes in the OBR forecasts is a resounding endorsement. The snappily named PSNFL (pronounced "pea-snuffle") cast as a ratio of GDP not only falls in the final two years of the forecast period, it peaks at 82.9% - lower than the November forecast by 0.7%.  That will have been Chancellor Reeves' happy place until last weekend. 

Background and run up to the day 

Until just a few days before the Spring Statement, financial markets appeared cautiously optimistic. UK equity markets were setting new record highs - along with others around the world; gilt yields were easing lower with prices buoyed by the January record public sector surplus (£30.4bn); debt interest cost fell to £1.5bn - its lowest level since March 2020; and sterling was close to recovering its post-Covid high against a trade-weighted basket of other currencies. 

In effect, investors appeared to be expecting a more or less fiscally neutral event in which Chancellor Reeves would 'bank' the near-term borrowing improvement and leave the November issuance profile broadly intact, with no material new gilt supply signal and the Debt Management Office's programme undisturbed by discretionary loosening. FX markets seemed to be treating the event as secondary to the Bank of England rate-cut cycle and President Trump's latest (post-IEEPA) tariff uncertainty. 

That cautious optimism took in its stride the Bank of England's downgrade to its GDP growth forecast for this year (to 0.9%, reinforcing expectations the OBR would also have to downgrade - again), unemployment rising to 5.2% and business investment contracting by almost 3%. Even the collapse of specialist UK mortgage provider MFS barely dented the mood outside the banking sector. 

The focus instead was on inflation (CPI) falling to 3% in January confirming a trajectory suggesting it could reach the 2% target set by the Bank of England in early summer so keeping alive hopes for at least one more 25bp rate cut this year. 

Septimana horribilis 

Then came the 'horrible week' starting with the Gorton and Denton by-election on February 26th, followed the next day by the dramatically more significant renewal of military action against Iran.  

The first saw the governing Labour Party beaten badly, presaging further losses in the May 7th local elections. The second prompted a spike in both crude oil and Liquefield natural glas markets, another "stagflationary" shock which could slow or even reverse expectations for further rate cuts.

Chancellor Reeves and her Treasury ministers and officials may have been looking at the January public sector surplus more urgently, weighing any need for an emergency fiscal boost against the need to keep that powder dry for later in the year when the full effects of the septimana horribilis would be more visible. 

Voices off 

So far, so dramatic. But behind the scenes of cyclical recovery were voices from such as the Institute for Fiscal Studies (IFS) and Institute for Government suggesting that all was not well with the framework in which fiscal policy is set. Both had explicitly warned against using the still-limited fiscal headroom for politically-timed gestures, especially given any OBR growth downgrade, medium-term pressures for even faster growth in defence spending and, more recently, commitments to increase provision for SEND - Special Educational Needs and Disabilities.

The IFS had gone further to suggest that the UK's fiscal framework has become "dysfunctional," calling for a long-run shift to a "fiscal traffic lights" dashboard, while explicitly warning this should only be attempted from a position of established credibility - not now. The dashboard as proposed might comprise a range of fiscal indicators with each one colour-coded (red, amber, green) as to consistency with an overall prudential fiscal stance. It would replace the single target measure of PSNFL/GDP as now or any other variant. 

The curious case of the dog that won't be barking this time 

Although the OBR was always expected to revise, to the extent necessary, any of its forecasts to accompany the Spring Statement, it was not going to update its assessment of the government's progress towards - or away - from compliance with the fiscal rules. 

This is a curious state of affairs. Since the OBR will be estimating all of the component parts of that assessment, independent analysts will likely undertake the final calculation themselves and comment on compliance with the fiscal rules anyway. One can't help thinking that although this curiosity aligns with Chancellor Reeves' wish for only one formal fiscal event a year, it seems to risk limiting the Treasury's ability to control the narrative on this key issue.