UK Economy Faces Challenges: 2025 Spring Statement Reveals Slashed Growth Forecasts

Consumer Discretionary

18 days agoPWG Publications

Spring Statement 2025: UK Economic Growth Forecast Slashed

The 2025 Spring Statement, delivered by Chancellor Rachel Reeves on March 26, 2025, marked a significant shift in the UK's economic outlook as the Office for Budget Responsibility (OBR) drastically reduced the forecast for GDP growth in 2025 from 2% to 1%. This adjustment reflects the current challenges faced by the UK, including heightened uncertainty in the global economy and rising borrowing costs.

Economic Background

The UK economy has been grappling with inflationary pressures, with inflation expected to average 3.2% in 2025, before dropping to 2.1% in 2026 and reaching the Bank of England's target of 2% by 2027[1]. The economic landscape is further complicated by global events, such as Russia's ongoing invasion of Ukraine and fluctuations in international trade policies, which have contributed to increased economic uncertainty[3][5].

OBR Forecasts and Fiscal Rules

GDP Growth Forecasts:
The OBR has upgraded its long-term growth forecasts for 2026 and beyond, predicting a GDP growth rate of 1.9% in 2026, 1.8% in 2027, 1.7% in 2028, and 1.8% in 2029[1][5].
Fiscal Rules:
The government aims to ensure the current budget is in surplus by 2029/30, a goal considered achievable by the OBR but with significant risks[5].
Public sector net financial liabilities should decrease as a percentage of GDP by 2029/30[5].

Government Policies to Boost Growth

To address these challenges and stimulate economic growth, the UK government has outlined several key initiatives:

Defence Spending and Overseas Aid

Defence Investment: Committing to increase NATO-qualifying defence spending to 2.5% of GDP by 2027, funded in part by reducing overseas aid from 0.3% of Gross National Income[2][3].
Overseas Aid Reductions: Savings from reduced aid will primarily support capital defence investments rather than day-to-day spending[4].

Infrastructure Investment

Capital Spending Increase: An additional £13 billion over five years to boost infrastructure, alongside £2 billion for social and affordable housing[2].
Construction Skills Package: Allocating £625 million to train up to 60,000 more skilled construction workers[2].

Planning Reforms

National Planning Policy Framework (NPPF) Changes: Reforms are expected to increase real GDP by 0.2% by 2029-30 and by over 0.4% by 2034-35, adding billions to the economy without incurring fiscal costs[2][3].

Impact on Living Standards

Despite a modest forecast for real wage growth, real household disposable income (RHDI) is expected to increase, though this growth may be partially offset by welfare cuts[4]. The government aims to enhance living standards through increased housing availability and imputed rent benefits for homeowners[4].

Conclusion

The 2025 Spring Statement highlights the UK government's efforts to navigate economic challenges through strategic investments and reforms. While immediate growth forecasts have been reduced, long-term optimism remains with plans to bolster infrastructure, defence, and productivity.

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