UK: Spring Statement forecasts show a bit more fiscal headroom (against a very uncertain backdrop)

The Office for Budget Responsibility (OBR) published its updated set of economic and fiscal forecasts.

Chancellor Rachel Reeves, as promised, announced very little on Tuesday, 3 March. Rather, she presented some of the OBR forecasts and used the opportunity to lay out a positive picture of the UK outlook (and ran through some Reform UK attack lines). While this was not a Budget, and the OBR did not update its assessment of the likelihood of fiscal targets being met, the forecasts show an increase in the forecast ‘fiscal headroom’ (the space in the forecasts before the fiscal rules are broken). That’s not a bad thing against a backdrop of significant uncertainty around the outlook.

The new forecasts show UK fiscal finances on a slightly more solid footing (for now): the deficit is expected to be smaller than previously forecast, with the reduction peaking at £8bn a year by 2030-31. Headroom against the fiscal rules has increased: against the current budget rule (where the current budget needs to be in balance by 2029-30), that headroom is now forecast at £23.6bn from £21.7bn previously.

There are several drivers for that forecast improvement, but this is mostly coming through the receipts line. Policy changes announced since the Autumn Budget are incorporated in the forecasts and worsen the fiscal finances outlook (primarily the additional promised funding for Special Needs education) but a number of things have offset this when it comes to the deficit.

• Without taking any policy changes into account, the upward revision to receipts amount to nearly £13bn a year by 2030-31. However, the basis for this improvement doesn’t seem very broad with two-thirds reflecting higher than forecast growth in UK equity prices since November.
• Higher than expected self-assessment receipts in 2025-26 also help (raising the forecast level of self-assessment receipts through the forecast).
• Lower inflation, interest rates and borrowing forecasts feed an assumption of lower debt interest spending in all years.

On the economy, the OBR has cut its GDP forecast by 0.3pp for 2026 compared to its November projections, while raising the forecast by 0.1pp for 2028 (unchanged beyond that). The downward adjustments in the near term mostly reflect weaker-than-anticipated economic data from late 2025, leading the OBR to identify increased cyclical weakness. The upward revision for 2028 reflects expectations of a cyclical recovery. The OBR has reduced its estimate of medium-term potential output too, primarily due to a downward adjustment in net inward migration. However, that is partly offset by a small improvement in forecast productivity growth attributed to increased investment into upgraded technology (capital deepening).

As for gilt issuance – as expected there is a sizeable reduction to gilt issuance forecast with the Debt Management Office (DMO) planning to sell £252bn of bonds in 2026-27 (a three-year low, although slightly higher than consensus, according to Bloomberg), subject to revision as we get more data.

The bigger picture painted by the fiscal forecasts is largely unchanged. The fiscal backdrop is not supportive with tax as a share of GDP set to increase and spending as a share of GDP set to fall (slightly). The deficit is still forecast to (therefore) reduce significantly over the forecast horizon from 4.3% of GDP in 2025-26 to 1.6% in 2030-31.  

If the impact on energy prices of conflict in the Middle East lingers, the forecasts may look a lot more challenging for the Chancellor by the Autumn Budget.

However, this is all before the events of the weekend. If the impact on energy prices of conflict in the Middle East lingers, the forecasts may look a lot more challenging for the Chancellor by the Autumn Budget given risks of higher inflation, slower growth and more pressure for energy bill support. In its March 2024 outlook report, the OBR assessed the potential impact of a widening conflict in the Middle East. In that scenario they assumed that oil, gas and electricity prices rose to 75% above their central forecast for a year (disruptions to goods supply chains also return temporarily to their pandemic peak). In that scenario, there was a significant deterioration in the public finances and over a five-year period, the deficit was £23.1bn higher per year on average (i.e. enough to wipe out the entirety of the Chancellor’s current headroom).

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