Chancellor confirms spending cuts as OBR trims growth forecasts
By Abigail Townsend
Date: Wednesday 26 Mar 2025
(Sharecast News) - The chancellor confirmed cuts to welfare spending on Wednesday while pledging to turn the UK into a "defence industrial superpower", in a spring statement designed to ensure the government's fiscal targets would still be met.
Rachel Reeves said her package of measures - designed to cut spending in the short term while boosting longer-term investment and growth - would see the budget move from a deficit of £36.1bn in 2025/26 to a £6.0bn surplus in 2027/28, rising to £9.9bn by 2030.
It would also restore "in full" the headroom against her "non-negotiable" fiscal rules.
"It is the responsible choice to reduce our level of debt and borrowing in the years ahead, so we can spend more on the priorities of working people," she told MPs.
The Office for Budget Responsibility published its most recent economic forecasts alongside the Spring statement.
It slashed its expectations for growth this year to just 1% from a forecast for 2% made in October.
However, the OBR upgraded its forecasts from 2026 forwards, in acknowledgement of Labour's plans for growth, including reforms to the planning system.
The fiscal watchdog now expects GDP to grow by 1.9% in 2026, up from an earlier forecast for 1.8%. It is then predicted to dip in 2027 to 1.8% and to 1.7% in 2028, before improving to 1.8% in 2029.
GDP shrank by 0.1% in January, after growing by just 0.1% in the fourth quarter.
The OBR also forecast inflation would reach 2.8% this year, before falling to 2.1% in 2026 and meeting the Bank of England's 2% target from 2027 onwards.
Inflation data published earlier on Wednesday showed it had unexpectedly shrunk to 2.8% in February.
Reeves said defence spending would be boosted by £2.2bn next year, in recognition of a more "uncertain world".
She continued: "This additional investment is not just about increasing our national security but our economic security too.
"We will put defence at the heart of our modern industrial strategy. That is how we make our country a defence industrial superpower."
Reeves also confirmed widely-flagged changes to welfare spending.
A number of Labour MPs have been vocal in their opposition to the changes, but Reeves argued: "The Labour Party is the party of work. We believe if you can work, you should work. If you can't work you should be properly supported. This government inherited a broken system."
The OBR forecast that the proposed changes would trim £4.8bn off the welfare budget in 2029/30.
Matt Swannell, chief economic advisor to the EY Item Club, said: "Today's statement saw the government meet its non-negotiable fiscal rules, but only after implementing further spending cuts.
"A weaker-than-expected economy and increase in market interest rates saw all the £9.9bn headroom left after the budget used up.
"However, the margin of error remains small...and once again risk being knocked off course by relatively normal shifts in the economy or financial markets."
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: "The chancellor's statement was a game of two halves, and it's been reflected in sharp market movements.
"Reeves appeared to be on the losing side of investment sentiment with downgrades to growth this year, but scoring goals of optimism with upgrades to GDP further ahead, and for forecasts for real disposable income to rise in the months to come.
"There were no big surprises in this statement, and that's exactly what the chancellor intended. Stability is the cornerstone of the government's agenda, and she appears to have done the trick of not unnerving investors further."
Rain Newton-Smith, chief executive of the CBI, said: "Weaker growth this year is a serious setback, but not a surprise given the burden businesses are shouldering after the Budget.
"The government must use the Spending Review to double down on unlocking investment to secure the more positive outlook for long-term growth."
The government is due to carry out the Spending Review in June ahead of publishing its next Budget in the autumn.
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