Yesterday, the Chancellor delivered her Spring Statement. Given the backdrop of war in the Middle East, clearly the government and the public currently have other priorities.
And anyway, the Chancellor had already flagged that the Statement would be just that – a statement – and not a ‘fiscal event’. This is to be welcomed; indeed, NIESR have long endorsed a move back to a single fiscal event each year as a way of reducing the uncertainty caused by too much speculation around fiscal policy.
While the Chancellor did not announce any changes to taxes or spending, there was positive news on gilt issuance and the OBR’s forecast for the current budget deficit.
GILT ISSUANCE
Yesterday afternoon, HM Treasury set out the Debt Management Office’s (DMO) financing remit for 2026-27. As NIESR flagged in our analysis, released last week, the higher-than-expected tax receipts of recent months have led to a reduction in the required volume of gilt issuance over the coming financial year from over £300 billion in 2025/26 to £252.1 billion for 2026/27.
This remains high but is heading in the right direction and should help put downwards pressure on yields. In turn, this should help the overall fiscal position as debt interest payments are reduced.
The big new risk is the war in the Middle East. There has already been a marked repricing in financial markets: 2-year yields have risen from 3.5% to 3.9%, and 10-year gilt yields from 4.25% to 4.5%, over the past three days. If higher oil prices persist, this could feed through into higher inflation and slower growth, putting series pressure on the fiscal outlook.
THE OUTLOOK FOR DEBT AND DEFICITS
At the same time as the Spring Statement, the Office for Budget Responsibility (OBR) published its latest forecasts for the evolution of the economy, the budget deficit, and public debt in its Economic and Fiscal Outlook.
Since the OBR’s November Forecast, the Office for National Statistics (ONS) has published data showing that GDP grew by 1.3% in 2025. This compares with the OBR November forecast of 1.5%.
“The OBR have revised their forecast for GDP growth in 2026 down from 1.4% to 1.1%.”
And the OBR have revised their forecast for GDP growth in 2026 down from 1.4% to 1.1%. The unemployment rate in the final quarter of 2025 was 5.2%, compared with the OBR November forecast of just below 5%.
The OBR had been expecting the unemployment rate to stay below 5% and fall to its assumed equilibrium rate of 4.1% by 2027. Their latest forecast is for the unemployment rate to rise to a peak of 5.3% later this year before falling back to its equilibrium rate by 2030.
It should be said that an estimate of 4.1% for the equilibrium (‘natural’) rate of unemployment seems optimistic given that no panelist in the recent CfM-NIESR survey thought the equilibrium unemployment rate to be below 4.25%. NIESR think a more realistic figure would be closer to 5%.
HIGHER TAX RECEIPTS
However, the impact of this weaker outlook for demand on borrowing is more than offset by higher tax receipts, leading to lower borrowing overall. Whereas the OBR had forecast in November the current budget surplus to be £21.7 billion in 2028/29, they now expect a surplus of £23.6 billion in that financial year.
Thus, the government still meets its stability rule, which mandates that the current budget has to move into balance by the end of the parliament.
One key risk to the public finances is that of migration. Net migration in the year to June 2025 was 87,000 lower than the OBR had thought in its November forecast and it has even been suggested that it could become negative by the end of 2026.
The OBR calculates that a 100,000-person fall in net migration would increase government borrowing by around £10 billion after five years, while work by NIESR suggests that zero net migration from 2030 onwards would leave the budget deficit just under 1% of GDP higher by 2040 than it would be given the Office for National Statistics’ most recent projections for migration.
“A much bigger risk is posed by the war in the Middle East.”
A much bigger risk, though, is posed by the war in the Middle East. This is not reflected in the OBR forecast. But the impact will likely be significant. Oil prices have already risen from around $70 a barrel (Brent Crude) at the end of last week to around $85 a barrel yesterday.
At the same time wholesale gas prices have more than doubled since the markets opened yesterday. These rises could have a serious impact on inflation, leading to higher interest rates and greater pressure on the public finances.
At the same time, higher energy prices would likely have a negative effect on demand. Reflecting this possibility, equity prices have already fallen (the FTSE-250 by around 5% this week) and, given the OBR’s forecast for increased tax revenue was largely based on higher equity prices, this will have a direct impact on public finances.
Although public-sector net financial liabilities (PSNFL) are expected to be lower as a percentage of GDP in 2028/29 than they were in 2027/28 – hence suggesting that the government is meeting its ‘investment rule’, which requires a reduction in PSNFL as a share of GDP by the end of the parliament – they are nonetheless expected to be 82.2% of GDP.
This is only marginally lower than the current (end January 2026) estimate of 82.4%. At the same time, public-sector net debt (PSND) is forecast to rise from 94.3% of GDP to 96.1% of GDP. It is clear from this forecast that the public debt position remains fundamentally unsustainable and that a serious medium-term plan to bring debt down as a share of the economy will be needed in the autumn.
DEBT SUSTAINABILITY
This brings me neatly onto the question of the sustainability of public finances. As the OBR stated in the first paragraph of their Economic and Fiscal Outlook: Over the past two decades, UK public sector debt as a share of GDP has nearly tripled and on a comparable basis is nearly double the advanced-economy average.
Public sector net borrowing remained at elevated levels of around 5 per cent of GDP over the past four years – persistently higher than the advanced-economy average on a comparable basis.
On the face of it, this would not seem to be a sustainable position for the public finances to be in.
Indeed, NIESR has long argued that the government needs to be reducing its debt so that it has the wherewithal to deal with negative shocks, such as a war in the Middle East.
Instead, the latest OBR forecast suggests that the debt ratio will be roughly flat over the next few years. I expect the impact of the war to lead to another ‘ratcheting up’ of the debt to GDP ratio.
With the equilibrium real interest rate higher than the trend growth rate, the UK government needs to be running primary surpluses for the debt to GDP ratio not to explode.
The government has not managed to do this for a quarter of a century and there is no sign that it will manage to do this in the future. With the Spring Statement, the Chancellor had an opportunity to commit to the importance of reducing the debt to GDP ratio. This opportunity was missed!
