Spring statement will lead to six months of ‘damaging speculation’, IFS warns

The Chancellor’s decisions at the spring statement will lead to six months of “damaging speculation and uncertainty over tax policy” ahead of the next budget, an influential economics think tank has warned.

During Wednesday’s statement, Rachel Reeves enacted further cuts to welfare in order to restore £9.9 billion fiscal headroom that the Office for Budget Responsibility told her would have been eroded if spending had continued unchecked.

She said this headroom had been “restored in full” thanks to her actions.

What the Chancellor has all but guaranteed is another six months of damaging speculation and uncertainty over tax policy

But Paul Johnson, director of the Institute for Fiscal Studies (IFS), warned that Ms Reeves’s commitment to her fiscal rules – while maintaining only a small headroom for unexpected extra costs – had left her “at the mercy of events”.

He added: “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 six or seven 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.”

He also said the Chancellor risked “losing the wood for the trees” in her cuts to welfare.

While rates of universal credit are expected to rise over the next few years, it will be by less than previously expected.

By 2029 for example, the weekly rate will be a pound less – at £106 – than previously set out.

Mr Johnson said this move risked undermining the idea that benefit reform “is being made for any reason other than chasing a fiscal number”.

Rachel Reeves has cobbled together just enough new announcements to restore her wafer-thin headroom against her fiscal rules, but another normal forecast revision in the coming months could easily throw her off course again

He described the spring statement as being a “holding exercise” for more significant decisions at the June spending review and the autumn budget.

The IFS director added: “We might be in for another blockbuster autumn budget. That didn’t go well between last July’s election and October’s budget. I fear a longer rerun this year.”

Institute for Government chief economist Gemma Tetlow said: “Rachel Reeves has cobbled together just enough new announcements to restore her wafer-thin headroom against her fiscal rules, but another normal forecast revision in the coming months could easily throw her off course again.”

Elsewhere, progressive think tank the Resolution Foundation described planned cuts to departmental spending are “a far cry” from austerity, but “not pain-free either”.

Its chief executive Ruth Curtice said: “The £3.6 billion trimming of departmental spending is a far cry from the austerity of the 2010s but it is not pain-free either – crucial public services like courts, prisons and local government will feel the strain of reduced funding in the second half of this Parliament.

“The Government’s welcome ambition to kickstart growth got closer to reality today, with planning reforms set to boost GDP in the coming years.

“But the outlook still looks bleak.

“Much has been made of the living standards pain Britain experienced during the 2010s, but the 2020s are still on track to be even worse.”