Markets

UK Spring Statement 2025: here’s what it means for markets

Ahead of her first Spring Statement, Chancellor Rachel Reeves promised little of the fiscal hurrah of her Autumn Budget. In its place was a set of figures for markets to digest and businesses to ruminate over. We take a closer look at the numbers.

02 Apr 2025

On the economy, borrowing requirements, and tax receipts

As widely foreshadowed in the press, the Office for Budget Responsibility’s (OBR’s) latest forecasts brought near-term upward revisions to borrowing, broadly in line with expectations.

The OBR also upped its near-term projections for the Central Government Net Cash Requirement (CGNCR) – the figure that influences gilt issuance. For 2024-25 fiscal year (FY) this was £173bn, up from £165bn in the October Budget (which itself was already up by £22bn since March 2024) – and doesn’t fully account for the borrowing overshoot so far this fiscal year.

For 2025-26 FY the OBR forecasts a CGNCR deficit of £143bn, up from £135bn. We believe this is likely to be closer to around £150bn given the borrowing overshoot so far this fiscal year.

However, the viability of these projections rests on optimistic assumptions for productivity and output growth (the OBR apparently undeterred by the UK’s continuing economic under-performance). For instance, on nominal GDP the OBR forecasts 4.2% growth for 2025 and 3.6% growth for 2026; while not unattainable, these are quite a departure from consensus.

Downward revisions to projected tax receipts, however, are far more plausible. Whether back-loaded spending cuts materialise remains to be seen, but delivery will not be made easier as the next election approaches.

The fiscal rules appear something of a distraction

In this Statement, Reeves’ fiscal rules have been met via a combination of favourable assumptions (higher productivity and GDP growth forecasts than those of independent external forecasters) and back-loaded spending reductions.

However, Total Managed Expenditure – the total amount that the government spends each year – is projected to remain around 44% of GDP, which would challenge any argument that the UK’s economic woes stem from insufficient government spending or that the UK is facing further austerity. Looking to the likely timing of the next general election, the OBR sees this ratio falling by just half a percentage point by the 2029-30 FY.

Given the stimulus Reeves delivered in the autumn, we think the UK fiscal stance remains fairly lax. Bank of England (BoE) policymakers will be wary about wading into political waters, but they cannot ignore that looser fiscal policy might lead to higher domestic inflation – and therefore higher rates for longer.

Where will the extra borrowing come from?

While today’s borrowing numbers broadly met our expectations, the bucket for long-maturity debt was cut to more than we had expected. Markets were pleasantly surprised, but it is worth noting that in pound terms the longs bucket remains chunky against a backdrop of limited investor demand, and that long-end issuance is likely to reach at least £40bn in the coming fiscal year.

Further borrowing increases are due as soon as April, and the gilt market still suffers from a structural shift on the demand side away from price insensitive, long-dated buyers to price sensitive, short-dated buyers.

We have been flirting with the bottom of our fair value range of 4.75%- 5.0% in 10-year gilts and nothing in this week’s announcement changed our assessment of the bearish underlying fundamentals for gilts.

The Spring Statement was not especially market-moving on the day, but underlined how precarious the UK’s fiscal position is - and that borrowing has been revised up for future years. Markets would be wise to acknowledge that and we expect further rises in gilt yields as the market digests the news.

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All Articles

UK Spring Statement 2025: here’s what it means for markets

On the economy, borrowing requirements, and tax receipts

The fiscal rules appear something of a distraction

Where will the extra borrowing come from?

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