IFS looks forward to 26th March

The Institute for Fiscal Studies (IFS) has published a note* looking ahead to the Spring Forecast on the 26th of March. Like most commentators, they consider Rachel Reeves to be in something of a political/fiscal bind.

This note from the IFS follows earlier commentary from Bloomberg that covered the Office for Budget Responsibility (OBR) forecast ahead of the 26th of March.

The IFS says that “it is possible – though by no means guaranteed – that the Chancellor will now be missing one or both of [her] fiscal rules under the Office for Budget Responsibility’s (OBR’s) updated forecasts." 

The problem is “…largely a result of her own earlier decisions. She chose a set of pass–fail fiscal rules, repeatedly declared these to be ‘non-negotiable’, and then set out to meet them by the smallest of margins.” 

To these constraints she has added a promise not to make policy changes in the Spring Forecast – her mantra has been only one fiscal event a year. Worthy though such an objective is, it has left Reeves “…completely exposed to global events, but also to run-of-the-mill forecast revisions from the OBR”. 

On the assumption that one or more of the rules will be missed, the IFS says the Chancellor has two main options: 

1. Prioritise policy stability 
   The Chancellor could restate her commitment both to fiscal sustainability and her fiscal rules, but then break the letter of those rules (legislated for in January) and delay any corrective fiscal action until the autumn. This approach has the benefit of avoiding the costs of twice-yearly fine-tuning of tax and spending plans. As the IFS says, “…in an uncertain world there is no meaningful economic difference between a forecast for a small current budget surplus in 2029/30 and a forecast for a small current budget deficit in 2029/30."
2. Prioritise the fiscal rules
   Reeves could abandon the goal of holding only one fiscal event per year at the first hurdle and announce tax rises and/or (even) tighter spending plans to reach a forecast of a current budget surplus in 2029/30. The Chancellor might worry that breaching the letter of her ‘non-negotiable’ rules could impact on financial markets’ perceptions of the government’s fiscal rectitude. A move to defer decisions to the autumn could also complicate adjustments to public service spending plans, as the multi-year departmental settlements are at present scheduled to be announced on 11 June. A delay would trigger months of speculation about possible tax rises in the Autumn Budget, like the uncertainties that arose after the ‘discovery’ of the infamous £22bn black hole. 

The IFS view is that the choice between the two options is not clear cut. It believes that much will depend on the weight placed on policy stability relative to the weight placed on adherence to the fiscal rules, and perhaps also on economic versus political considerations. 

In terms of potential tax changes, the IFS considers the obvious option would be to extend the cash-terms freezes to various tax thresholds for two years, which are currently set to expire in April 2028. The IFS calculates that would likely raise £5.0bn in 2028/29 and £10.1bn in 2029/30, with more if inflation continues to exceed the OBR’s forecast. However, a continued freezing of thresholds was explicitly ruled out in the October 2024 Budget. 

The alternative to tax rises is a squeeze on spending, which the IFS calculates would reduce the average real-terms growth rate to around 0.9% per year (down from 1.3%). The rumour mill is currently highlighting welfare spending cuts as the focus, with an announcement from Liz Kendall, Secretary of State at the DWP, reportedly due soon. However, the OBR is known to be wary of counting projected benefit cuts that rely on claimant numbers falling, which points to possible cuts in payment rates – and not just for new claimants. 

The IFS projects that Government borrowing for 2024/25 will initially come in at £143bn, £16bn more than the OBR’s projection at the time of the October 2024 Budget and £76bn more than the number that accompanied Jeremy Hunt’s last Budget in March 2024.

As with every fiscal event and government statement, we recommend caution with any speculation of announcements ahead of the event. Please look out for our commentary on the Spring Forecast on the 26th, in which we will highlight any key considerations for financial planning. If you have any related questions please get in touch. 

The information in this article is correct as at 20/03/2025.

This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

• *https://ifs.org.uk/articles/look-ahead-2025-spring-forecast