Set amid the backdrop of the emerging Middle East conflict, the Spring Statement on 3 March provided an opportunity for the Chancellor to unveil updated economic forecasts from the Office for Budget Responsibility (OBR). In reality, these forecasts, which were developed before the onset of the war, did not take into account the widening conflict and increasing disruption to the global economy, not least the impact on inflation caused by the oil disruption.
Lindsay James, Investment Strategist at Quilter, observed after the event that the Spring Statement should have been a low-key event used mainly as a platform for the Chancellor, and that the OBR forecasts shared – improving headroom against fiscal rules, marginally lower inflation, lower gilt yields and lower interest rates – already looked out of date given events unfolding in the Middle East.
Bond yields have risen sharply since, and expectations for rate cuts have been scaled back. Gas prices have also spiked, raising fresh concerns about a burst of inflation should the conflict become protracted, meaning fiscal headroom may need recalculating in the weeks ahead.
James noted that while the OBR downgraded growth for this year, it subsequently upgraded growth for the following two years, with the net effect broadly unchanged. She pointed out that the government’s ambition to stimulate the economy has yet to be matched by the actual forecasts and results, and that the OBR itself acknowledges the fiscal outlook remains challenging even before any geopolitical shocks are factored in – with a high tax burden, intensifying demographic pressures and a debt-to-GDP ratio that could rise without a meaningful turnaround.
Her view was that markets are likely to pay little attention to the Spring Statement itself, focusing instead on the new economic reality created by the unfolding conflict.
Addressing the conflict and reiterating her commitment to defence spending, Rachel Reeves said the government would plot a course through the current uncertainty and aim to secure the economy through shocks. She also reiterated the government’s intention to hold only one major fiscal event each year – the Autumn Budget – arguing that limiting policy changes outside of that gives businesses and households greater certainty.