- The UK recovery lost momentum in the last sixth months of 2024.
- Business optimism also fell towards the end of last year, with finance leaders expecting UK corporates to cut capex, discretionary spending and hiring over the next 12 months. However, optimism remains well above the lows seen in 2020 and 2022.
- The Bank of England cut interest rates by 0.25 percentage points to 4.5% in February and signalled a gradual approach to further rate cuts this year. The Bank also revised down its forecast for UK economic growth in 2025, from 1.5% to 0.75%.
- Inflation is slightly above the Bank of England’s 2% target. It expects inflation to peak at 3.7% in the second half of 2025, in part due to rising energy prices.
- In last October’s Autumn Budget the government announced plans to raise public spending by roughly £70bn annually, funded through greater borrowing and by the largest post-election tax rise in over 30 years, largely shouldered by corporates.
- The Office for Budget Responsibility (OBR) expects this additional spending to boost short-term growth, making the UK the fastest growing G7 economy in 2025. But developments since October suggest it will have to significantly downgrade its forecast for this year in March.
- The NHS is set to receive the bulk of the increased spending but many ‘unprotected’ departments still face real-terms cuts in expenditure.
- Despite higher taxes, government debt is expected to remain at a high level throughout the parliament.
- The OBR estimated very limited headroom for the government to meet its new fiscal rules in October; an economic shock or even a modest revision to growth forecasts, which seems likely, could see them breached.
- Timing: The Chancellor has announced that an economic and fiscal forecast will be published by the OBR on 26 March 2025. She intends to respond to the forecast with a parliamentary statement. Decisions based on the government’s multiyear spending review are now expected to be announced in June.
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