UK spring statement: An economic balancing act

Investors should closely watch how the UK government balances the array of spending cuts announced in today’s Spring Statement with the need to boost economic growth.

The UK economy has faced its fair share of challenges over recent years – weak growth, stubborn inflation and higher government borrowing costs chief among them. In addition, figures released last week by the Office for National Statistics (ONS) showed government borrowing to be higher than expected in February – £10.7 billion versus predictions of £6.5 billion.

To help address this, today’s Spring Statement included spending cuts as the government works to balance the books. Cuts designed to save several billion pounds were seen in areas including welfare spending and the civil service.

For investors, this must all be weighed against the government’s need to boost economic growth. This need is particularly important after the Office for Budget Responsibility (OBR) halved its UK GDP growth forecast for 2025 from 2% to 1%. 

Lilian Chovin, Head of Asset Allocation at Coutts, says, “It’ll be interesting to see how the government finds a good balance between trying to meet its own fiscal rules and fostering economic growth.

“That is obviously a challenge. But if they can make it work we could see positive developments ahead. For example, the increased spending on the country’s infrastructure and defences announced today could benefit the country’s economy over time as it creates jobs and boosts manufacturing.”

Infrastructure, along with its associated sectors, and defence are two key areas of potential opportunity for investors, especially as they look likely to be a focus of future government spending as well.

But there are other areas of opportunity too. These include banks, where higher for longer interest rates have been supportive, and healthcare as investors return to more defensive growth stocks amid current geopolitical uncertainty.

Overall, there was a muted reaction from markets to the Chancellor’s Spring Statement today as most of the announcements were expected.

Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. 

Lilian says the UK economy has been going through “something of a soft patch” but there are “small, early green shoots” of positivity.

“Growth has been weak and inflation has been sticky, keeping interest rates higher for longer,” he says. “This in turn increases company borrowing costs and dampens consumer spending – both impacting share prices.

“But while small, there are signs of positivity around the UK economy emerging which are worth keeping in mind. For example, the country’s private sector output growth reached a six-month high in March.”

At Coutts, we believe the UK stock market is attractively valued but currently lacks any imminent catalyst for a strong sea change.

We are neutral on the UK, but see good, selective opportunities. We therefore invest through a fund manager experienced in seizing opportunities across the market – whether within large multi-national companies or smaller mid-cap firms.

Lilian says, “The FTSE 100 can behave very differently to the FTSE 250, so we wanted a manager who could actively access the areas where there are opportunities.”

The UK economy’s challenges have been seen in its interest rate journey, with rates failing to fall as quickly as markets initially expected. Currently, economists are predicting two more rate cuts by the end of the year, whereas in January they were expecting three reductions.

The Bank of England (BoE) recently held interest rates at 4.5%, as inflation stubbornly stays above its 2% target. UK inflation has just dropped slightly to 2.8% for the 12 months to February 2025, down from 3% in January (according to the ONS).

The BoE’s interest rate hold echoes developments on the other side of the Atlantic. The US Federal Reserve also opted to keep rates unchanged recently. Both central banks cited elevated uncertainty, driven largely by tariff concerns and associated trade tensions.

But Lilian stresses that we remain in a falling interest rate environment.

He says, “The general view in markets is that, while it’ll take longer than expected, UK interest rates will continue to fall. And if that happens, it could boost consumer spending and therefore aid economic growth and market performance.”

The case for lower interest rates appeared to be supported by the OBR’s latest inflation forecast, which says inflation will rise to 3.2% this year but then fall rapidly to somewhere around the 2% target from mid-2026 onwards. Lower inflation could make it more likely that the BoE will cut rates.

The government announced a number of significant tax changes in its Autumn Budget last October, with inheritance tax, capital gains tax and pensions all impacted. Those changes were unaltered by the Spring Statement, and some of them will be introduced next month. Here are five of the most important:

1) Increased employer national insurance contributions

From next month, employers will start paying a higher rate of national insurance on salaries from £5,000 a year. That’s down from over £9,000 a year currently. In addition to this, the government is raising the National Minimum Wage – from 1 April it will go up by 6.7% for over-21s and 16.3% for 18 to 20-year-olds.

2) Agricultural or business assets no longer eligible for full inheritance tax relief

From April 2026, agricultural or business assets will no longer be eligible for full relief from inheritance tax. There is a £1 million allowance, but if your business or farm is worth over £1 million, anything above that will effectively be taxed at 20%. 

3) Proposed changes to the role of pensions in inheritance planning

The government is seeking to change the status of pensions so they form part of people’s estates. This could mean that, whereas currently in some circumstances you could pass on your pension tax free when you die, from 2027 that may no longer be the case. The detail of how this will work in practice is still to be set out in legislation.

4) Higher capital gains tax

There were changes to capital gains tax from 30 October 2024. On property, the high-end rate didn’t change. But for all other assets it rose to 24% for high earners. This means every time you sell an investment asset you pay more tax on the money it’s made. 

5) A completely new tax regime for ‘non-doms’

There are new rules for those who come to live in the UK from elsewhere, which apply from 6 April 2025. Put simply, it’s no longer about your domicile – where your ultimate home is – but about how long you’ve lived in the UK. This has far-reaching implications for the amount of tax you pay, and when.

Tax reliefs applied under current legislation may change. The availability and value of any tax reliefs will depend on your individual circumstances.

Please speak to your private banker if you’d like to discuss the impact of the spring statement or upcoming tax changes on your finances.

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This article should not be taken as a recommendation or advice.

We're here to help, but please be aware we cannot offer tax advice. We recommend you contact an independent tax advisor to discuss your personal tax situation.