Spring Budget 2025: ‘overly optimistic’ growth forecasts mean chancellor could be plotting another tax raid

Chancellor Rachel Reeves may soon face the difficult decision to raise taxes again in the upcoming Spring Budget, with insights from City analysts suggesting that recent economic data does not paint an encouraging picture. The latest forecasts from the Office for Budget Responsibility (OBR) have raised concerns among economists, who believe they present overly optimistic growth expectations in light of recent performance.

In the previous October projections, the OBR estimated that the economy would grow by a robust 2% in 2025. However, new private sector forecasts recently published by the Treasury have considerably downgraded these expectations, predicting growth of just 1% this year. This reduction follows a dismal growth rate in the UK, where Gross Domestic Product (GDP) only managed a meager increase of 0.1% in the final quarter of 2024 after stagnating in the preceding quarter.

Dissecting the UK’s economic performance reveals a mixed bag; while the services sector noted a minimal expansion of 0.2% during the fourth quarter, and construction showed a modest growth rate of 0.5%, the production sector fell by 0.8%. This decline signifies a broader challenge, as the UK faces the pressing issue of weak productivity growth, a fundamental driver of economic health.

Analysts warn that the OBR’s productivity forecasts, projecting growth of 0.9% in 2025 and 1.1% in 2026, seem overly ambitious. In contrast, private sector experts forecast even less optimistic numbers of 0.6% for 2025 and 0.9% for 2026. As noted by Oxford Economics, every 0.1% reduction in productivity could cost the Chancellor a staggering £7 billion, meaning a conservative estimate suggests a £21 billion gap could emerge in Reeves’ budget if productivity continues to falter.

With the Chancellor’s fiscal roadmap, it seems increasingly likely that she may need to implement tax increases to maintain fiscal discipline. This shift in outlook compels consideration of Reeves’ earlier commitments. At a Treasury Committee meeting in November, Reeves insisted that the Spring Budget would not meet the need for tax increases; however, as economic realities set in, that stance may face significant pressure.

Neil Insull, a partner at Blick Rothenberg, highlighted that lower growth projections could unsettle the already shaky bond market, making tax revenue increases a potential necessity for the Chancellor to adhere to her fiscal rules. The scenario conjures up the prospect of further tax increases announced alongside expected spending cuts in the upcoming Spring Budget, scheduled for March 26.

Interestingly, while there appears to be a consensus that tax rates for businesses may not face escalations, this does align the Chancellor in a tight spot. Insull expressed skepticism about additional burdens on businesses, especially since the Autumn Budget raised employers’ National Insurance Contributions (NIC) by £25 billion. Such a move disproportionately impacted sectors like hospitality and retail, raising concerns about potential repercussions on economic growth and the employment landscape.

There is room for Reeves to reconsider some of her prior fiscal measures, particularly regarding National Insurance thresholds—changes that could significantly benefit lower-paid workers and struggling sectors. Despite the possibility of adjustments, concerns linger over whether the Chancellor can afford to diverge too drastically from her previous plans, especially following the publication of the Corporate Tax Road Map that promotes fiscal certainty.

As discussions around fiscal strategy unfold, Deutsche Bank has coined the Spring Budget a “painful sequel” to the Autumn Budget, anticipating it will indeed reflect downward revisions to the OBR’s economic forecasts. This sentiment is echoed by a Financial Times survey of economists, reinforcing the notion of impending tax rises. Reeves aims to bridge a £22 billion hole inherited from the former Conservative administration and has already projected to raise £40 billion with her budgetary proposals.

Indeed, the rising inflation rate, which jumped to 3.9% in January, coupled with recent interest rate cuts by the Bank of England, adds layers of complexity to the economic landscape. Consumers anticipate increased government borrowing costs, and the atmosphere among financial markets has shifted to one of trepidation, according to investment experts.

The ramifications of any proposed tax hikes will likely reverberate through the economy, impacting average households profoundly. Although the Labour Party promised not to burden “working people” during the election campaign, the new National Insurance increases have already resulted in price hikes and stagnant wage growth across sectors.

According to Grant Thornton’s business outlook tracker, many businesses plan to pass on the increased employment costs to consumers by raising prices in 2025. Notably, a significant number of surveyed firms are considering reducing hiring or offering lower pay packages in response to cost pressures. The expectation is that such decisions will contribute to higher inflation pressure and prolong elevated interest rates.

In summary, as Chancellor Rachel Reeves prepares for the Spring Budget, the confluence of poor economic growth forecasts and longstanding promises not to raise taxes presents a complex challenge. While the need for fiscal responsibility grows stronger in the face of disappointing productivity, the social and political ramifications of potential tax hikes loom large. Only time will reveal how the Chancellor navigates this precarious landscape, as households and businesses alike brace for what may come next in the economic narrative.

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