5 March 2025
If you are covering the latest news in financial markets, including potential spending cuts by the UK government and tariffs in the US, please find below a comment from Lindsay James, investment strategist at Quilter:
“Yesterday marked the day that the OBR presented updated economic forecasts to the Treasury, with two further updates due before the Spring Statement on March 26th. With its October forecasts signalling 2% growth in 2025, a figure that was already out kilter with many economists, a significant cut is expected to this forecast given the Bank of England recently halved its forecast from 1.5% to 0.75%. For context, GDP grew at 0.1% in the three months to December from the previous quarter.
“With fiscal headroom, the buffer the government has against its self-imposed fiscal rules, highly sensitive to changes in growth expectations, it is likely that the previous £9.9bn of headroom will be wiped out as a result, requiring either tax hikes or spending cuts. With limited scope to raise taxes further due to both earlier promises and the economic impact already seen from hiking tax on employers, Reeves is likely to be looking at significant spending cuts, with reports today suggesting that welfare will be one of the areas under pressure.
“However, the savings required are of a size that she is likely to have to go to a range of government departments to find savings in order to remain within fiscal rules. With recent stories of wasteful excess in multiple corners of government spending at the same time that unprotected government departments have been stripped to the bone, there is an urgency to not only tackle this but also put the UK on a stronger growth footing in the years ahead. Winning over an under employed workforce whilst also tackling the deep-rooted issues that have held the UK back – under investment in infrastructure, red-tape in all areas of planning, a mismatch of skills and waning productivity – are an unenviable challenge for Rachel Reeves.
“Meanwhile in the US, Donald Trump has delivered a performance to Congress that was somewhat overshadowed by the surprising announcement of fresh tariffs on Mexico, Canada and China the previous day, pulling down markets as investors were caught by surprise. As the market digested this, Commerce Secretary Howard Lutnick attempted some damage limitation by saying that Donald Trump may scale back the tariffs on Canada and Mexico as soon as the following day, and that they would in any case be reset in a month’s time.
“However, this is government on a whim, with tariffs impacting millions of people, thousands of businesses and billions of dollars of trade, where visibility is now close to zero and policy can swing around on a daily basis. Chaos appears to be the plan, with no end in sight. Whilst businesses may eventually opt to shift manufacturing to the US for ease, eventually strengthening the US economy and reducing the corporate tax burden, this is no quick or cheap decision and will likely bring months of disruption and further volatility to the stock market.”
