Inside the Tent: Low Drama, High Stakes

Mike Buckley, Senior Counsel
03/03/2026

The Spring Statement was designed to be a low-drama update for markets, businesses and households, a forecast refresh rather than a policy event. It was meant to signal steadier fundamentals, even as external risks have become harder to ignore.

Chancellor Rachel Reeves had reasons to be cheerful going into the statement. Public finances recorded a £30.4 billion budget surplus in January, according to the ONS, while retail sales rose 1.8% on the month, the strongest increase in almost two years. The OBR expects inflation to fall faster than it projected in the autumn, and the Chancellor said her fiscal headroom had edged up to £23.6bn, a little more breathing space against her rule, at least on current assumptions.

Yet there are also clouds on the horizon. Growth remains subdued, with the OBR downgrading its 2026 forecast to 1.1% from 1.4% in November. The labour market is cooling, unemployment has risen to 5.2%, the highest level in nearly five years, and wage growth is easing. That may help inflation, but it is also consistent with weaker demand, and the risk is that business investment stays cautious just when the economy needs it to strengthen.

A further structural issue is the outlook for labour supply. Lower net migration can reduce pressure on housing and public services, but it can also tighten recruitment in labour-constrained sectors and weigh on trend growth over time, which matters for everything from consumer demand to the public finances.

The biggest immediate, however, is geopolitics. The US-Israeli strikes on Iran have injected fresh uncertainty into energy markets, with higher oil and gas prices feeding through to input costs, inflation expectations and interest-rate assumptions. The war adds further pressure on the Government both to reduce exposure to volatile fossil fuel prices and to find fiscal space for higher defence spending, including through deeper collaboration with European partners.

Those pressures are already visible, as the surge in energy prices has shifted rate expectations. Markets now imply roughly an 85% chance of one quarter-point Bank of England cut by December, down from two fully priced-in cuts last week. Ten-year gilt yields moved to around 4.5%, underlining the risk that borrowing costs, for government and, indirectly, for firms and households, may stay higher than expected.

At the same time, the Government is also under pressure to improve household incomes and reduce the cost of living. Given last week’s by-election win by the Greens, Ministers will face louder calls to increase spending and ease household costs, including from restive Labour MPs. This raises the likelihood of short-notice interventions later in the year, such as changes to fuel duty, targeted household support, or additional spending commitments, even though financial leeway remains limited.

On the fiscal framework, the key message is that the Chancellor still has some room against her rule, with headroom rising slightly to £23.6 billion. That is a meaningful buffer on paper but is not large relative to the scale of potential shocks from energy prices and higher borrowing costs. As a result, the Autumn Budget is likely to feel more consequential for business.

For now, the economy is doing better than the mood music suggests, with inflation moving in the right direction and the fiscal position a touch firmer. Reeves was on solid ground as she pointed to higher growth, wages and investment under her management of the economy.

But volatility remains likely, especially if the US-Iran conflict raises energy prices significantly, and for a long period, and delays interest-rate cuts. The challenge for the Government now is to turn “stability” into stronger underlying performance by lifting growth and productivity, tackling unemployment, and easing cost pressures that still weigh on households and business and, in turn, on demand.

Picture credit: Flickr