The Chancellor Rachel Reeves has delivered her Spring Statement to Parliament, giving key economic and spending updates on the UK economy.
Reeves acknowledged difficulties facing the UK Government’s budget thanks to global economic forces, such as Donald Trump’s trade tariffs.
As such, the so-called ‘fiscal headroom’ – which is the amount of extra cash available for Government spending - had all but disappeared. This is chiefly caused by higher Government and debt repayment rates.
In order to tackle this, the Chancellor has enacted a range of spending cuts both to the Government’s administration and the welfare bills. The Government intends to enact 15% cuts to ministry budgets, reducing civil servant headcounts and making other efficiency savings.
For welfare, stricter rules and limits on welfare payment increases are being implemented to achieve £4.8 billion in cuts.
OBR forecasts inflation issues ahead
As part of the Chancellor’s updates, the Office for Budget Responsibility (OBR) provides its economic forecasts for the economy. This dictates much of what the Government is able to achieve in terms of spending, investing and borrowing.
Worryingly the OBR has cut its GDP growth forecast for the UK economy in 2025 from 2% to just 1%. This is a problem for the Government because it means that it can expect to take less tax thanks to a slower economy.
Alongside this slowdown, the OBR has also forecast that inflation is only set to fall to the Bank of England’s target of 2% by 2027 – staying higher than expected for longer. Again, this is an issue for the Government because it means interest rates will stay higher in order to slow down price increase. This will keep the Government’s cost of borrowing higher too.
However, one small ray of sunshine amid the gloom is wage increases. Average wage rises mean that by 2029, working people could be £500 per year better off after factoring in inflation, according to the Government’s interpretation of OBR’s estimates.
Self-assessment tweaks
The Government has announced some small tweaks that could be of relevance to some families, especially those who have earners that have to fill out self-assessment tax returns.
The Government is set to make penalties for late assessment filing harsher. This includes increasing the penalty for over 15 days late up from 2% to 3% of the tax owed. For 31 days or more, it is set to jump to 10% per annum from just 4% - a significant increase.
Elsewhere, the Government has said it is making it easier for households who have to pay the High Income Child Benefit Charge to report their tax liabilities. From Summer 2025 these families will be able to use a digital system to repay through PAYE, instead of having to fill out a tax return every year.
ISA reforms
There were no major announcements that could directly affect financial portfolios in this update, with areas such as pensions and tax rates left untouched.
However, there was one small notice in the Spring Statement documents that could be something to watch out for in future. This relates to the ISA allowance.
There was significant speculation ahead of the Spring Statement that the ISA allowance would see a cut to the level of cash that could be saved into a tax-free account. Specifically, it was suggested that the annual cash ISA allowance would be cut to just £4,000. However, such a specific policy was not announced.
That being said, the documents published by the Treasury did in fact contain more information on the potential reform. The Government has committed to a review of the ISA system, with a view to encouraging retail investments and supporting growth.
While we don’t yet have a clear picture of what this reform could look like, it is a hint at the Government’s thinking on the future of the ISA system.
If you would like to discuss any of the issues raised in this piece and how it could affect your long-term finances, don’t hesitate to get in touch.
