Spring Forecast 2026

Verdict: More fiscal headroom, but subject to change

Chancellor Rachel Reeves promised that today's statement on the Office for Budget Responsibility's Spring Forecast would be relatively inconsequential and that the Autumn Budget would be the sole fiscal event each year. She did not disappoint. There were no new measures announced (and accordingly no Treasury ‘Red Book’), while changes to both the macro and public finance forecasts since last November’s Budget were minor. Even so, the Chancellor did gain a modest amount of headroom against her two main fiscal rules, mainly thanks to stronger tax receipts, but also owing to lower projected debt service costs.

However, the financial market turmoil arising from the military strikes in the Middle East demonstrates how fragile the underlying assumptions can be. A jump in oil and gas prices, plus a higher yield curve, if sustained, would result in higher borrowing forecasts and eat into the Chancellor’s fiscal headroom. Moreover, and as the geopolitical events of the past four days also demonstrate, there is very little respite from pressure for the government to spend more and we would be surprised if it does not agree to boost defence expenditure over the next few years.

One major positive though is that the government did not succumb to the temptation to use the Spring Forecast as an excuse to hold a de facto mini-Budget, especially bearing in mind its poor showing in opinion polls and its loss in last week’s Gorton and Denton by-election. An annual calculated and considered calibration of fiscal policy, rather than decisions being made on the hoof, as they have so often been in recent years, contributes to both predictability and stability.
 

The state of public finances: income and borrowing

In aggregate, changes to the OBR’s latest projections of the public finances have been favourable. Apart from the upcoming financial year (2026/27), the revisions to the main measure of borrowing (PSNB) have been modestly downwards throughout the forecast horizon, with the profile through the course of the next few years continuing to decline. Borrowing is expected to be £132.7bn in 2025/26 (previously £138.3bn), narrowing to £63.4bn in 2029/30 and to £59.0bn in 2030/31. Although the OBR did not conduct a formal assessment of the outlook for the public finances against the Chancellor’s fiscal rules, it did forecast and publish the relevant aggregates. It is straightforward therefore to calculate the headroom against the main fiscal rules and the changes since November.

The fiscal mandate specifies that the current budget position (PSNB ex-investment) should be in surplus in the target year, currently 2029/30. The OBR’s latest forecast is a surplus of £23.6bn compared with £21.7bn in November. This means the headroom has increased by circa £2.0bn. Meanwhile, the supplementary, or debt, rule is expected to be met with a margin of £27.1bn, an increase of £2.7bn since the Budget.

The key driver of the modest rise in the headroom is stronger tax receipts, chiefly income tax and capital gains tax inflows. By 2029/30 total receipts are forecast to be £8.6bn higher than at the time of the Budget. The brighter outlook for tax receipts is partly offset by higher expenditure. Policies announced since November, such as greater support to Local Authorities, combine to raise borrowing by £4.2bn by 2029/30, with an offset of £1.9bn provided by lower debt interest expenditure.

Of course, much can happen over the course of the next four years to shift these variables one way or the other. For example, projections remain vulnerable to major market moves such those on the back of the conflict with Iran. Policies can (and probably will) change as well. The OBR remarked that the government's commitment to raising defence spending to 3.5% of GDP by 2035 would push borrowing up by £40bn. Much of this would be classified as investment, and therefore not all of this would impact the current budget position. However, it does illustrate the uncertainties behind longer-term projections.

The outlook for growth, inflation and household income

As largely expected, the OBR’s updated macroeconomic forecasts released today included only minor tweaks to the projections. Indeed, the level of GDP in 2030 is just a touch lower (-0.3%) than forecast in November. Although recent developments in the Middle East have cast doubt on the long-term relevance of these forecasts, we would be hesitant to entirely dismiss them – there is still a good chance that the conflict and the subsequent increases in energy prices prove short-lived, limiting the impact on the UK economy.

Arguably, the biggest structural change to the forecasts concerns migration. Back in November the ONS revised down its estimates for net migration, mostly due to higher estimated emigration (such as British residents leaving the UK). The OBR has reflected this revision in its forecast, lowering net inward migration by around 50,000 adults a year on average (by 2030, this reduces the adult population by 200k relative to the November forecast). As a result of this, labour supply has been downgraded, as has potential output growth. Despite this, GDP per person is actually marginally higher, a fact Chancellor Reeves highlighted to the Commons. This is due to the OBR’s assumption that those British residents leaving the UK were slightly less productive than average, based on their lower earnings.

A further point to add on the forecasts is that, although the level of GDP is broadly similar in 2030 to what was estimated in November, the composition of economic growth has changed slightly. 2026 GDP growth has been downgraded to 1.1% from 1.4%, now sitting between the Bank of England’s forecast (0.9%) and our own (1.2%). However, the OBR judges that this weakness in the early years of the forecast horizon and the opening up of spare capacity allows for a rebound in the subsequent few years (Table 3). Longer-term economic growth meanwhile remains unchanged at 1.5%.

Aside from the headline GDP statistics, the OBR downgraded its inflation forecasts slightly, albeit only for 2026, to 2.3% from 2.5%. There is of course particular risk around this forecast though given this week’s surge in energy prices. The OBR also forecasts a slightly higher peak in the unemployment rate this year than before but expects conditions to improve thereafter.

In terms of what matters to households, there was only a very minor tweak to real household disposable income growth over the forecast horizon. The OBR expects consumers to spend more of this disposable income too, with notable downward revisions to the saving rate. Again, considering events over the last few days we wonder if that might be too optimistic, with households being reminded of the need for a rainy-day fund to weather unexpected financial shocks, such as rising energy bills. The government is also likely to have been reminded of the importance of a fiscal buffer – in the current environment, a healthy degree of headroom against the fiscal rules is certainly sensible.

Following today’s fiscal non-event we look towards two key upcoming events. Firstly, there will be the Mais lecture at the end of the month, which we presume will be the venue for Chancellor Reeves to deliver the big economic growth speech that has been rumoured in the press. Here we might gain greater insight into her plans to boost economic output. We also await the findings of the independent investigation examining the sharp rise in UK NEETs (Not in Education, Employment, or Training), which should be published in the coming months.