Spring Statement: what you need to know

The Chancellor stuck to the script today. Blame the last lot, confirm the rules, and cross your fingers that growth picks up.

Rachel Reeves is in an unenviable position. While the mantra wore thin - ‘we promised, we delivered, they opposed’ - there is some truth in it. Being more Tory than the Tories is not a bad strategy for a party that has struggled to demonstrate economic competence in the past.  Ultimately, however, the Labour government will soon be measured on its own achievements. There is a time limit to can-kicking.

There was nothing in Rachel Reeves’s first Spring Statement that had not been comprehensively leaked. It was confirmed that:

• The OBR has cut its short-term growth forecast from 2% to 1%. Thereafter, growth remains anaemic for the rest of the parliament but slightly higher than forecast at the time of the Budget.
• A combination of lower growth and higher interest payments wiped out the slender £9.9bn headroom when it comes to meeting day to day spending from tax receipts. Without further cuts in spending, the government would have fallen £4.1bn short of hitting its stability rule by 2029/30.
• By cutting welfare (by £3.4bn) and departmental spending (by £3.6bn) it will restore this (perhaps inadequate) buffer and meet its stability rule two years early.
• Likewise, the investment rule (that measures net debt as a proportion of GDP) will be met in good time.
• Defence spending will rise to 2.5% of GDP by 2027, with an ambition to hit 3% within the next parliament.
• Inflation will rise from this morning’s temporary dip to 2.8%. The average this year will be 3.2%, up from 2.6% forecast at the Budget.

Market reaction

The Chancellor will be relieved that she achieved her principal objective of not spooking the markets. Investors took the speech in their stride.

• Gilt yields were largely unchanged during and immediately after the speech. At just over 4.7%, 10-year gilts have already priced in a likely increase in bond issuance by the government. Gilts offer a more attractive income than US Treasuries or German Bunds, reflecting concerns about the higher inflation risk here.
• The stock market was largely unmoved too. Defence spending increases had been pre-announced and much of the benefit of re-arming will be felt in the US where the market leading companies are based. UK housing stocks were unimpressed by the Chancellor’s rhetoric about planning and housebuilding, although the OBR has confirmed that the government’s measures will structurally increase GDP growth. This will have a direct impact on the UK jobs market and UK businesses.

The long-term picture

It is not hard to see why the Chancellor is so keen to deflect blame for where we find ourselves. She has picked up a very poor hand.

According to the Resolution Foundation, growth in the first half of the 2020s has been cumulatively negative and the lowest in more than a century.

Borrowing rose more between 2019 and 2024 (by 16 percentage points of GDP) than in any other major country. Debt stands at just over 100% of GDP compared to 63% in Germany.

Britain has consistently run a larger government deficit than the EU average. Investment has been lower.

Thanks to a greater reliance on index-linked debt, we are more vulnerable to spikes in inflation.

Slower growth and poor productivity make financing our debts harder than it is for our peers.

We will spend £105bn this year on debt service. That is more than universal credit, defence, investment or education.

The only way out of this bind is growth.

What it all means for your clients’ investments

As we approach the end of the tax year, many are considering where to invest their (still very generous) ISA and pension contribution allowances.

Although, today’s Spring Statement provides a gloomy backdrop to investment decisions, fortunately it does not need to concern you and your clients unduly for a few reasons.

First, a well-balanced portfolio need not, and should not, be over-exposed to the UK market. Diversification is a key principle of good investment, and it is easily achieved.

Second, investing in the UK stock market is not the same thing as investing in the UK economy. We enjoy one of the world’s most international-facing stock markets.

Third, the UK stock market’s relatively low valuation already prices in much of the gloom surrounding the economy and public finances.

In addition to our investments in equities, there remain attractive opportunities for diversification into other assets. Bonds offer a high and sustainable income and uncorrelated returns. Cash provides a high yield at almost no risk. And the government’s commitment to planning reforms provides a stable backdrop for infrastructure investments.