Before the first missiles landed in Tehran, Rachel Reeves was looking forward to today. Her spring ‘forecast’ statement was going to be a doddle. The plan – to have the smallest intervention by a Chancellor since Philip Hammond in the spring of 2018 – was a sensible one.
Britain’s fragile economy could not have handled months of speculation about black holes, tax hikes and gilt yields. So, at the November Budget, the Chancellor made clear that there would be no scoring of her fiscal rules by the OBR this time round, no tax announcements and no major policy changes either. No rabbits inside hats or rats under rocks.
The Treasury, this time, has succeeded. There has been barely any speculation in the run-up to today’s statement. In fact, it would not surprise me if most of the country were not even aware that there is a spring statement today. The only question that has even really been discussed has been how small today’s measures will turn out to be.
Markets were calm when the Office for Budget Responsibility (OBR) finished their work last week. That was until all hell broke loose in the Middle East. As markets opened overnight into Monday, we saw oil and gas prices spike, stock markets collapse and bond yields move sharply. A fifth of the world’s supply of liquid natural gas was taken out of action. Turmoil has returned.
The result: if Trump and Israel’s war in Iran proves to be a long one, then much of what we will hear from the Chancellor today is already out of date. Rising global energy prices and disrupted supply chains will put inflation firmly back on the menu, while new trade barriers will make any forecast growth even more lacklustre.
Nevertheless, Reeves will push on. While the OBR’s predictions will not reflect geopolitics (their forecasts use market data from January), she may have rewritten her speech to reference the ‘headwinds’ whipped up by ‘an uncertain world’. The rest of her statement – which we expect to be around 20 minutes long – will focus on the OBR’s updated view of Britain’s economy.
The headline she will want voters to take from those forecasts is that Britain has ‘turned a corner’ on the cost of living. To make that claim, she will point to new forecasts for inflation which will see CPI coming close to the 2 per cent target as early as April. Brits will start to feel better off – and her message will be that her plans are working.
Beyond that, we’re told, she won’t say much else. Still, there are three areas of detail I’ll be looking out for:
- The first is inflation. Yes, the OBR are likely to forecast a sharp fall in the rate of price rises this year as pressures cool and the measures she took at her second Budget on freezing regulated prices take effect. But how long can that last? Already, market expectations of interest rates (a good proxy for inflation sentiment) were showing signs of an uptick in 2027 and 2028 – as the below graph shows. As a trader friend explains: ‘some of the government’s fiscal policies are inflationary so a longer term view that whilst rates will go down now because inflation is going down and we need to stimulate growth, at some point the Bank of England would maybe need to put rates up a bit to make sure that inflation isn’t getting out of control again.’
2. The next is unemployment. The OBR’s November forecast has already proved wrong: they expected a peak of 4.9 per cent and we have already hit 5.2. How high do they expect the jobless rate to go and for how long? But more importantly who will they blame? Economists are of the view that minimum wage hike and the £25 billion raid on employer national insurance have damaged the jobs market. Will the OBR lay blame at the No.11 door?
3. Finally I’ll be watching for how credible the OBR views Reeve’s spending plans to be. An underappreciation of the tax and spend plans the Chancellor announced in November is how ‘front-loaded’ they were. That is to say if Reeves is to be believed then we have a heck of a lot of spending to deliver now that will be paid for by tax hikes that come into effect around the time of the next election. Will the OBR comment on the credibility of those plans today? Will the Chancellor? Clearly, she is hoping that ‘something just turns up’ that means she does not have to deliver them. I’ll be keeping an eye for any hint of what that ‘something’ might be today.
Immigration and tax will be other areas worth paying attention to as well. With net migration now falling faster than expected, the OBR may opine on the economic impact of that change, while a record January tax take and surplus might be reflected in our borrowing figures. If there is any windfall, Labour’s backbenchers will put pressure on Reeves to spend it. Meanwhile, fiscal realists will want to see her outline plans to deal firmly with global events. Don’t count on either of that today.
Whatever the Chancellor reveals, though, we’ll be ready with live reaction on a special edition of Reality Check. Join James Heale and me – as well as special guests – on The Spectator’s YouTube channel from 12:15. We’ll bring you the statement, followed by reaction and analysis.
Comments