What does Rachel Reeves’ ‘low-key’ Spring Statement mean for markets?
Ahead of Rachel Reeves’ Spring Statement on Tuesday, Investec’s Chief Economist Philip Shaw sat down with CityAM’s Rupert Hargreaves to discuss what investors should look out for in the key statement.
Rupert Hargreaves: Next Tuesday, the Office for Budget Responsibility publishes updated economic and fiscal forecasts, as required under the 2011 Budget Responsibility Act, with Rachel Reeves responding. With the Chancellor saying this is not a fiscal event and that no new policies will be announced, where does the market focus sit?
Philip Shaw: In a “no-measures” statement, the forecast becomes a clean read of how the OBR thinks the economy and public finances are evolving under current policy. Investors will go straight to what has really changed since November on growth, inflation, interest rates and, by extension, the borrowing and debt paths.
Rupert Hargreaves: Even without policy changes, which parts of the forecast tend to do the most work for gilts and sterling?
Philip Shaw: The medium-term fiscal arithmetic and the macro assumptions that sit underneath it. A small change in nominal GDP, debt interest costs, or tax receipts can move the deficit path materially by the end of the forecast horizon. That is why a document that looks “technical” can still be price-relevant: it is effectively the independent baseline that sits behind the government’s fiscal rules.
Rupert Hargreaves: “Headroom” is the shorthand City readers will hear all week. In November, the OBR showed a current budget surplus of £22bn in 2029/30 and a similar margin of £24bn against the debt rule. How should we interpret those buffers?
Philip Shaw: Headroom is the gap between where the OBR forecasts the public finances will be and the minimum required to meet the fiscal rule at the relevant point in the forecast. In November, the OBR forecast the current budget position in 2029/30, meaning total borrowing excluding investment, would be a £22bn surplus. That surplus was the headroom against the primary rule. On the debt sustainability target, the margin was assessed at around £24bn.
The key point, though, is that headroom is not “spare cash” and it is not a policy pot waiting to be spent. It is a forecast margin that can move quickly as the OBR updates its view on growth, inflation, market interest rates and how sensitive receipts and spending are to those variables.
Rupert Hargreaves: What typically shifts headroom between one forecast and the next?
Philip Shaw: Typically, it’s three things. First, any policy changes on taxation and expenditure. As mentioned earlier, no new policies are expected this time. Second, how the economy and the public finances have performed since the previous forecast. Third, judgments about economic prospects, including growth, productivity, inflation and interest rates.
Even when policy is unchanged, the latter two factors can materially alter whether the rules look comfortably met or only just.
Rupert Hargreaves: Recent public finance outturns suggest things have improved a bit in-year. January’s data show borrowing in the first 10 months of FY2025/26 running below the OBR’s Budget projections. What does that tell you?
Philip Shaw: It tells you the starting point for the forecast may be a little better than the OBR pencilled in last November. In practical terms, if borrowing is coming in below the profile at this stage of the year, that can feed through into a lower full-year borrowing figure, and that can, in turn, support the medium-term path.
But it is still important not to over-read any single month. The useful question is what is driving the undershoot: stronger receipts, lower debt interest, slower spending growth, or timing effects that unwind later. The OBR’s tables will show that decomposition.
CityAM: There will be no formal assessment by the OBR of the government’s performance against its fiscal mandate alongside this exercise. Does the absence of a “scorecard” matter?
Rupert Hargreaves: Less than it sounds. Markets do not need a narrative verdict when the building blocks are all in the forecast. Investors will still look at the current budget balance at the end of the horizon and the debt-to-GDP trajectory around the target year. If those metrics sit on the right side of the rules, the market will draw its own conclusions about whether the fiscal framework remains on track under current policy.
Rupert Hargreaves: Does a better series of outturns reduce the likelihood of further fiscal tightening, meaning discretionary tax rises or spending cuts designed to lower borrowing?
Philip Shaw: It can reduce the near-term pressure, yes, because the primary driver of “tightening” is often the need to restore or protect headroom against the rules. If the OBR’s numbers still show the rules being met with a similar or larger buffer than November, it becomes easier for markets to assume there is no immediate requirement for additional discretionary measures purely for rule compliance.
The caveat is that headroom is a forecast margin, not a guarantee. It can be eroded by weaker growth, higher interest rates, less buoyant receipts or, of course, policy changes. So, the tone will depend on what the OBR does to the underlying assumptions, not just the latest borrowing print.
Rupert Hargreaves: On the real economy, the OBR in November forecast 1.4 per cent GDP growth for this year and 1.5 per cent for subsequent years. Do you expect major changes?
Philip Shaw: We doubt there is a strong case for a wholesale rewrite. Unless the OBR thinks the economy’s supply capacity or the inflation and rates backdrop has shifted materially since November, revisions are more likely to be incremental.
Our own forecast is a little softer at 1.2 per cent this year, but that is largely mechanical.
Rupert Hargreaves: Mechanical in what sense?
Philip Shaw: It is essentially “carry-over” from a disappointing end to 2025. If growth was weaker than expected in the final months of last year, that lowers the starting level of GDP for this year. Even if quarterly momentum improves from here, the calendar-year total can still come out lower. It is an arithmetic point. (Removed sentence.)
Rupert Hargreaves: Are you seeing signs of a broader pick-up in spending from surveys and the housing market – what do they indicate to you?
Philip Shaw: The most interesting signal is breadth. When surveys improve across consumer-facing sectors and business activity, and housing market indicators begin to firm at the same time, it often points to confidence feeding into spending decisions. Housing is not just about construction: it is linked to transactions, household goods, renovation activity and, more generally, willingness to make large financial commitments.
If those indications are sustained and show up in hard data, it would suggest upside risks to a “steady” growth profile. That is why readers should watch whether the OBR keeps its growth track broadly intact or leans into a slightly stronger consumption story.
Rupert Hargreaves: Media reports quote a government source saying the Spring Forecast will be “boring”. Is “boring” necessarily true in market terms?
Philip Shaw: “Boring” in policy terms can still be meaningful in pricing terms. If the OBR nudges the borrowing path down, or if it sees debt stabilising a touch sooner, that can change the perceived resilience of the fiscal position. Equally, if the OBR marks up debt interest costs or trims growth, that can compress headroom and change the conversation even without a single policy announcement.
Rupert Hargreaves: If CityAM readers look at one thing first on Tuesday, what is it?
Philip Shaw: The end-of-horizon numbers: the current budget balance in 2029/30 and the debt path around the same point. Those lines tell you whether the fiscal rules still look comfortably met on current policy and whether the buffer has widened or narrowed since November. Everything else, including how “boring” the day feels, follows from that arithmetic.