Rachel Reeves delivered the spring statement on Wednesday, 26th March.
The statement focused on fine-tuning departmental spending plans and welfare policy in light of the Office for Budget Responsibility’s (OBR) downgraded economic forecast, as well as “going further and faster” to accelerate growth areas.
There’s a lot to cover, so we’ve broken it down to highlight the key elements to help you navigate the upcoming procurement landscape.
Economic outlook
According to the OBR’s latest forecast, the UK’s economic and fiscal outlook has become more challenging since the Autumn Budget. The department reported that domestic output stagnated in the second half of 2024, with business and consumer confidence trending lower. The outlook has also become more uncertain due to geopolitical risks, putting upward pressure on defence spending and a tightening of global trade restrictions. Furthermore, higher energy and food prices alongside high wage growth has caused inflation to rebound to a quarterly peak of 3.7%by mid-2025, before returning to target over the rest of the forecast period (2029/30). Against this challenging backdrop, the OBR has downgraded its GDP growth expectations to 1.0% this year, half the rate forecast during the Autumn Budget.
Balancing the books
Despite the downgraded outlook and tough fiscal conditions, the government has protected investment spending, with the OBR judging the government’s planning reforms to deliver growth of 0.2% by 2029, a small silver lining.
Before the impact of new policies, borrowing was projected to be £13.1 billion higher in 2029-30 than in the October forecast. Against this weaker outlook, the chancellor announced a set of policies that reduce borrowing by £9.7 billion and improve the current balance by £14.0 billion in 2029/30. The government has balanced the books through a mix of £8.3 billion in welfare cuts plus £3.6 billion in new squeezes on day-to-day departmental spending. According to the Institute for Fiscal Studies, this represented a rare fiscal event in which it was government policies that raised money, on average.
Overall day-to-day departmental spending will rise by 12% in real terms between 2023/24 and 2029/30. On the other hand, unprotected departments such as Justice and the Home Office will be in line for cuts of 4.5% on average over the next four years of the parliamentary term.
Economic risks and uncertainties
According to the Resolution Foundation, the current headroom of £9.9 billion against the fiscal mandate is only one-third of the average of £31.3 billion that chancellors have set aside against their fiscal rules since 2010. It is a very small margin compared to the risks and uncertainty inherent in any fiscal forecast, least of all the heightened risks and uncertainty surrounding current domestic and global developments.
- The tax-to-GDP ratio is forecast to increase to a post-war high of 37.7 % of GDP in 2027/28. Part of this increase is driven by the policies announced at the Autumn Budget, including the increases in employer National Insurance Contributions and capital taxes.
- Departmental spending plans for the three years beyond 2025/26 will be set at the spending review this summer. The forecast for these years implies significant pressures on unprotected departments.
- The welfare cuts announced in the Spring Statement amount to the largest package of welfare savings since July 2015. The full impacts of these policies, and the actual savings gained, is yet to be seen.
Public sector reform
In line with the ambition of driving value for money and making the public sector more productive, the government has put in place structural reforms to fundamentally change the public sector, including the recent announcement that NHS England will be brought back into the Department of Health and Social Care. The spring statement confirmed the following plans:
- The £3.25 billion Transformation Fund has been created to support the reform of public services, explore opportunities in digital technology and artificial intelligence, and streamline frontline delivery. The Spring Statement confirms the first allocations from the Transformation Fund, with £42 million for three frontier AI exemplars led by the Department for Science, Innovation and Technology, and a £150 million government employee exit scheme to make the Civil Service more efficient and reduce administration costs.
- The Regulation Action Plan, published in March 2025, commits the government to cut the administrative costs of regulation on business by 25% by the end of the parliament.
- Under the Plan for Change, government departments will reduce their budgets by 15% by 2030 with savings on back-office functions expected to total £2.2 billion. Public sector workforce reform will also be a key theme across this summer’s spending review.
Capital spending
The Spring Statement confirmed government capital spending of a further £13 billion over the parliamentary term (in addition to £100 billion announced in the Autumn Budget) to support infrastructure, housing and defence innovation. The following commitments were outlined in the budget:
- The government has announced an additional £2 billion for social and affordable housing for 2026/27, to support the ambition of building 1.5 million homes in England by 2030.
- To ensure the construction industry has the capacity to deliver the plan, the government has committed to funding a £625 million package for skills in construction, expected to provide up to 60,000 more skilled workers in the construction industry. The Construction Industry Training Board (CITB) has also committed £32 million to support over 40,000 industry placements in construction each year.
- The proposals to link up Oxford and Cambridge to form an innovation cluster, also known as the Oxford-Cambridge Growth Corridor, could add up to £78 billion to the UK economy by 2035, according to the chancellor. Central to achieving this vision are completion of the new East West Rail line and the construction of the Oxford-Cambridge Expressway.
- £4.8 billion has been committed to the strategic road network in 2025/26. The funding includes £1.3 billion for road renewals and £1.6 billion for local road maintenance
- The chancellor also announced strategic partnerships between the National Wealth Fund (NWF) and Greater Manchester, West Yorkshire, West Midlands and Glasgow City Region to help regions develop and secure long-term investment opportunities.
Defence
In February 2025, the government announced a commitment to increase defence expenditure to 2.5 % of GDP from April 2027, rising to 3% in the next parliamentary term. In line with this uplift in defence spending, the Spring Statement confirmed an additional £2.2 billion towards the MOD budget for 2025/26. The budget includes investments into advanced technologies and refurbishments of the defence estate. The MOD will set out details on how it will reform UK defence in the upcoming Strategic Defence Review and Defence Industrial Strategy. Reforms confirmed by the chancellor include the following.
- Defence procurement reform: MOD will take a new ‘segmented’ approach to defence procurement along with associated timescale targets. Segments would be:
- major platforms (e.g., tanks, frigates, aircraft) with a timescale target to go from an average of six to two years to contract
- pace-setting modular upgrades (e.g. ,comms, sensors, weapons upgrades) with a timescale target to go from an average of three to one year to contract
- and rapid commercial exploitation (e.g., uncrewed systems/drones and digital software) with a timescale target of three-month cycles.
- UK Defence Innovation (UKDI): UKDI aims to enable innovative technology to rapidly progress from idea to frontline and drive faster innovative procurement. The UKDI is expected to be running by July 2025, with a ringfenced budget of £400 million from next month.
- Novel technologies ringfence: increasing the proportion of MOD’s equipment procurement spend on novel technologies such as dual-use tech, uncrewed and autonomous systems and AI-enabled capabilities, spending at least 10% from 2025/26.
Spending review: Summer 2025
The government will set out its plans for spending and key public sector reforms at the spending review, which will conclude on 11 June 2025. The spending review will set out plans for day-to-day spending for four years to 2028/29, and for capital spending for five years to 2029/30 alongside the long-awaited 10 Year Infrastructure Strategy.