The UK’s economic growth forecast has been slashed by half for 2025, with the official watchdog predicting a much weaker recovery. In her spring statement, chancellor Rachel Reeves aimed to balance the books through fresh spending cuts, including welfare cuts.
Real GDP growth for 2025 is now expected to be just 1%, a sharp decline from the previous forecast of 2% issued by the Office for Budget Responsibility (OBR) last autumn. The OBR highlighted that domestic output “stagnated” in the second half of last year, with both business and consumer confidence continuing to trend downward.
The OBR also confirmed that Reeves is on track to miss her target of achieving a budget surplus by 2029-30. Instead, the forecast suggests a deficit of £4.1bn by the end of the decade, primarily driven by higher debt interest payments and weaker-than-expected tax receipts.
The OBR said: “Higher debt interest payments and weaker-than-expected receipts take the current balance from a surplus of £9.9bn to a deficit of £4.1bn in 2029-30, before accounting for new policies.
The watchdog added that more expensive energy and food will push inflation up this year. It said: “Higher energy and food prices and more persistently high wage growth cause inflation to rebound to a quarterly peak of 3.7% in mid-2025, before returning to target over the rest of the forecast.”
Read more: Spring statement LIVE: Rachel Reeves delivers key speech as OBR cuts UK growth forecast in half
Here are the key takeaways from the spring statement:
Inflation will average 3.2% this year, Rachel Reeves said. “The OBR forecast that CPI inflation will average 3.2% this year before falling rapidly to 2.1% in 2026 and meeting the 2% target from 2027 onwards,” the chancellor said.
In 2026, inflation is forecast to drop to 2.1% — just above the Bank of England’s target, but below the 2.3% inflation rate forecast in the budget.
Reeves said inflation is then seen at around 2% from 2027 onwards.
Ahead of the spring statement on Wednesday, the UK inflation rate unexpectedly fell to 2.8% in the year to February.
In her speech, Reeves reiterated her commitment to stability, promising that no new tax rises would be introduced. Despite concerns about rising defence and debt costs, she avoided any significant tax changes, sticking to cuts in government spending.
However, the chancellor did announce plans to bolster HMRC’s efforts to tackle tax evasion and additional penalties for self-assessment and VAT late payers starting in April 2025.
Reeves said the fiscal rules she set out in the October budget are “non-negotiable”, positioning them as central to economic stability.
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However, the OBR forecast that taxes as a share of GDP will hit a record high of 37.7% by 2027-28, marking a significant increase from the current 35.3%. This elevated tax burden is expected to remain stable for the rest of the forecast period
In line with expectations, the chancellor announced a £2.2bn increase in the Ministry of Defence’s (MoD) budget for the next financial year, with a total of £6.4bn more earmarked by 2027. Reeves also detailed plans to dedicate a minimum of 10% of the MoD’s equipment budget to novel technologies, such as drones and AI, to enhance the UK’s defence capabilities.
Reeves said: “We will spend a minimum of 10% of the Ministry of Defence’s equipment budget on new novel technologies, including drones and AI enabled technology, driving forward advanced manufacturing production in places like Glasgow, in Derby and in Newport, creating demand for highly skilled engineers and scientists and delivering new business opportunities for UK tech firms and startups.
“We will establish a protected budget of £400m within the Ministry of Defence, a budget that will rise over time for UK defence innovation with a clear mandate to bring innovative technology to the front line at speed.
“And we will reform our broken defence procurement system, making it quicker, more agile and more streamlined.”
Reeves highlighted that Labour’s planning reforms will have a lasting positive impact on the UK economy. According to the OBR, these reforms are expected to increase GDP by 0.2% by 2029-30 and by 0.4% over the next decade. This growth boost, worth £6.8bn, is seen as the largest positive impact ever reflected in OBR forecasts.
Reeves also pointed out that these planning changes would help deliver an additional 1.3 million homes over the next five years, helping the government move closer to its target of 1.5 million new homes by the end of the current parliament.
A significant portion of the spring statement was dedicated to public service reform. Reeves announced £3.25bn of investment to improve government services’ efficiency and productivity. This investment aims to reduce the overall cost of running government operations while maintaining quality public services.
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Reeves noted: “That is money brought forward now to bring down the costs of running government by the end of the forecast period by making public services more efficient and more productive.”
Additionally, she stated that the ongoing reform efforts would lead to £3.5bn in savings by 2029-30, thanks to more efficient public service operations.
On the eve of the statement, it was revealed that the Office for Budget Responsibility had revised its estimate of savings from planned welfare cuts. The original projection of £5bn in savings by 2029-30 was reduced to £3.4bn.
“The Labour party is the party of work,” Reeves said, adding that the government’s welfare reforms are designed to help people become more self-sufficient. The OBR’s estimate of savings from welfare cuts includes reductions to universal credit’s health element for new claimants, alongside freezes on certain benefits.
Reeves stressed that her government is focusing on improving employment support, with £1bn allocated to help people back into work, as well as £400m to support job centres. Welfare spending as a share of GDP is expected to begin declining from 2026.
Reeves told MPs: “Today, the OBR have said that they estimate the package will save £4.8bn in the welfare budget reflecting their judgements on behavioural effects and wider factors.
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“This also reflects final adjustments to the overall package, consistent with the secretary of state’s statement last week, and the government’s Pathways to Work Green Paper.
“The universal credit standard allowance will increase from £92 per week in 2025-26 to £106 per week by 2029-30 while the universal credit health element will be cut by 50% and then frozen for new claimants.”
She added that “welfare spending as a share of GDP will fall between 2026-27 and the end of the forecast period”.
More than 3 million people will lose around £1,700 each as a result of the government’s cuts to benefits, official figures show.
Analysis by the Department for Work and Pensions (DWP) revealed that 3.2 million families — including current and future benefit claimants — will lose an average of £1,720 a year.
However, a further 3.8 million families will gain an average of £420 a year, they said.
Overall, the DWP assessment says the welfare cuts will push an additional 250,000 people — including 50,000 children — into relative poverty.
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