Chancellor delivers Spring Statement

On 26 March the Chancellor of the Exchequer, Rachel Reeves, delivered the 2025 Spring Statement which had a heavy focus on improving government efficiency and increasing spending on defence. The Chancellor thus announced the creation of a £3.25bn Transformation Fund “to support the fundamental reform of public services, seize the opportunities of digital technology and Artificial Intelligence (AI), and transform frontline delivery to release savings for taxpayers over the long-term”. Savings to back-office functions of government departments are expected to save £2.2bn by 2029-30.

The Chancellor further reconfirmed the Government’s intention to spend 2.5% of GDP on defence from April 2027 with an ambition to increase this to 3% in the next parliament. The Government also committed to have 10% of its defence equipment spending “on novel technologies like dual-use tech, uncrewed and autonomous systems and AI-enabled capabilities” from next year. And looking at exports, the Government committed to spend to further promote UK defence exports.

Other noteworthy announcements included an additional £2bn spend on social and affordable homes in 2026-27. The Chancellor said the OBR had assessed that the Government’s previously announced planning reforms “will increase the level of GDP by 0.2% by 2029-30 and by over 0.4% by 2034-35”.

UK government sets out changes to the benefits system

Ahead of the Spring Statement the Secretary of State for Work and Pensions, Liz Kendall, announced a number of reforms to the benefits system including a £5bn cut to spending on health-related benefits, a duty for claimants to engage with job support programmes, and a £1bn investment in back-to-work programmes.

Looking at the announcement in more detail the headline level of Personal Independence Payments (PIP) will not be cut or frozen, as some had believed would happen, however, the health element of Universal Credit (UC) (currently LCWRA) will almost halve for new claimants – it will be frozen in cash terms for claimants. This is expected to come into effect from April 2026. The reduction in value for new claimants represents a reduction of around £2,500 a year. The basic rate of UC will increase by £7pw (or 8%) in order to ‘rebalance’ the different payments in UC. A new ‘premium’ will be added to the UC health element for those with severe, lifelong disabilities, and they will not need reassessment.

The daily living component of PIP will also become more difficult to access for some claimants from November 2026, with the introduction of a new requirement for at least 4 points to be scored against any one criteria to receive an award.

The Work Capability Assessment – which is used to determine a claimant’s ability to work and eligibility for the health element in UC – will be scrapped from 2028. There will now be a single assessment, for PIP, that will also determine access to the health element of UC through qualification for the daily living component.

At the moment, only 63% of people receiving the health element of UC are also receiving PIP (although 95% of people receiving PIP currently receive a Daily Living Award). The remaining 37% – around a million people – would lose access to the health element within UC.

UK faces slow growth  

The Spring Statement was delivered against a backdrop of slow growth with the latest quarterly UK GDP data from the Office for National Statistics (ONS) pointing to the economy having grown by only 0.1% in the final quarter of 2024 (Figure 1), while timelier monthly data (for January 2025) shows a slight monthly contraction of 0.1% between December and January.  

Figure 1: UK real GDP quarterly growth, Q4 2021 to Q4 2024

Source: (ONS) 

In its March Economic and Fiscal Outlook (released after the Spring Statement), the OBR revised its forecast of UK GDP growth in 2025 downwards from 2% to 1%, but revised GDP growth upwards in every other year of their forecast period (which covers the fiscal year 2024-25 to 2029-30). In general, forecasters maintain a positive growth outlook for UK GDP for the coming year and beyond, but they vary in their short-term predictions. In its latest Monetary Policy Report (February 2025), the Bank of England (BoE) revised its GDP growth forecast for early 2025 down from 1.5% to 0.75% for early 2025. It attributed the revision to slowing global expected GDP growth and a few UK-specific factors: (1) lower-than expected outturn GDP growth (2) a slight loosening of the labour market, and (3) falling business confidence. The BoE does, however, expect GDP growth to return to the 1-1.5% range later this year and for the rest of the forecast period. The latest OECD global GDP forecast (March 2025) has also revised UK growth downwards, from a previously forecast growth rate of 1.7% this year to 1.4% (attributed to slowing global growth, rather than UK-specific factors). Recent forecasts from NIESR and the IMF (January 2025) maintain a positive growth outlook, forecasting a 1-1.5% growth rate for 2025.

UK inflation sees marginal slowing, in line with forecasters’ expectations

The latest UK Consumer Price Index (CPI) inflation data from the ONS (for February 2025), shows an annual CPI rate of 2.8% in February (compared to prices in February last year), down from 3% in January – a slight fall which was in line with surveyed forecasters’ expectations (Figure 2). The ONS attribute this slight downtick to contributions from the clothing and footwear and recreation and culture buckets of goods and services.

Beyond the headline inflation measure, the ONS also report that core inflation (the basket of goods that excludes energy, food, alcohol and tobacco to strip out the volatile components of inflation) in February decreased to 3.5% on the year, down from 3.7% in January. Goods inflation decreased to 0.8% on the year, down from 1% last month – while services inflation remained at 5.0% on the year. 

Figure 2: CPI, goods, services and core annual inflation rates, UK, February 2020 to February 2025 

Source: GLA analysis of ONS data 

The forecasters’ consensus currently predicts CPI inflation throughout 2025 to be above the BoE’s 2% inflation target. The BoE forecasts CPI at roughly 3.5% throughout 2025 (attributed to higher global energy costs), while the latest OBR and NIESR forecasts have CPI at 3.2% and 2.6% respectively (which they believe is caused by a mixture of elevated energy prices, policy effects, and a modest positive output gap). The OECD forecasts CPI at 2.7% in 2025 (the highest among G7 nations), but unlike other forecasters it explains the elevated rate is due to robust wage and services inflation. 

Rising bills may hit consumption in the coming months 

Coupled with this above target inflation, and with the end of the financial year approaching, Londoners face a flurry of rising costs across essential services (water, council tax, and energy), placing further pressure on household budgets and potentially dampening consumer spending across the broader economy.​ 

From 1 April 2025, the average Band D council tax in London is set to rise by 4.7% (5% across England), with all London boroughs other than Wandsworth and Kensington and Chelsea pursuing around the maximum allowed increase (which has been explained as needed to maintain essential services amidst escalating costs). Newham council has received special permission to increase its council tax by 8.99% to address severe financial challenges. From April, many second-home owners in England will also now face doubled council tax rates (under the Levelling-up and Regeneration Act), a policy adopted by roughly 70% of local authorities and applicable to roughly half a million homes in England.  

Also effective from 1 April, the energy price cap will be adjusted, resulting in an average annual increase of roughly 6% (£111) for households on standard tariffs. Ofgem attribute the adjustment to sustained high wholesale gas prices and reduced storage capacities in Europe. The energy secretary recently stated that the government would work with Ofgem to develop a potential debt relief scheme, noting the prevalence of household energy debt (which was roughly £4bn in 2024 and is expected to grow without intervention).

Thames Water has also announced that, starting 1 April, typical water and wastewater bills will increase significantly, with wholesale prices expected to rise roughly 31% compared to last year and household bills increasing roughly 39%. These adjustments are part of the company’s strategy to address funding and infrastructure challenges. Thames Water states it had initially sought a 53% price increase over the next five years to support its investment program, but were met with an Ofwat decision of a 35% ceiling. Thames Water has appealed this decision to the Competition and Markets Authority (CMA).

​As households allocate a larger share of their budgets to these essential services, discretionary expenditures are likely to decline, affecting spending in sectors reliant on “non-essential” consumer demand (such as retail, hospitality, and entertainment). This impact will be most acutely felt by lower-income households, who spend a greater proportion of their total expenditure on necessities – and consequently have less flexibility to absorb rising costs without reducing spending on non-essentials. 

US continues to announce new tariffs

The US government continued to announce the imposition of new tariffs this month. These include an additional 10% tariff on Chinese exports to the US, and the imposition of a 25% tariff on steel and aluminium imports into the US. This latter move led to retaliatory tariffs from some, with the EU imposing tariffs that would affect up to €26bn of American goods while Canada imposed tariffs of C$30bn on US goods. Meanwhile 25% tariffs on cars and car parts exports to the US have been announced to come into effect on 2 April.

The US Federal Reserve (Fed) has also downgraded in March its forecast for US GDP growth this year to 1.7% compared to the 2.1% growth it had forecast in December. The Fed also pushed up its forecast for inflation with it now expected to rise by 2.7% this year compared to the previous forecast of 2.5%. The Fed’s chair, Jay Powell, acknowledged to reporters that the recent tariffs had been responsible for some of the forecast change with him saying that “clearly some of it, a good part of it” was due to tariffs. He further added that they “tend to bring growth down and push inflation up”.

Germany announces big spending package

The German parliament, the Bundestag, this month approved plans by Friedrich Merz, who is expected to be the next Chancellor of Germany, for plans to spend up to €1tn over the next decade in the country’s military and infrastructure. Such a move required a two-thirds majority in the Bundestag in order to change the country’s constitutional borrowing limit. In comments to MPs Merz said “this decision we are making today on our country’s defence readiness, is no less than the first major step towards a new European defence community”. Adding “we are combining the restoration of our defence capacity with the modernisation of our infrastructure”.

Elsewhere, the European Central Bank (ECB) cut Eurozone interest rates again in March. Rates were reduced by a quarter of a percentage point to 2.5%. This was the sixth reduction in the Zone’s rates since the ECB started cutting them in 2024 from their record high of 4%. However, in commenting on the move the ECB said “monetary policy is becoming meaningfully less restrictive” which has been taken as a hawkish statement on future cuts.

The British Museum was the most visited attraction in 2024

Data from the Association of Leading Visitor Attractions (ALVA) showed that the British Museum was the most visited UK visitor attraction in 2024. The data showed that there were 6,479,952 visitors to the museum last year, an increase of 11% on 2023. This was the second year in a row that the museum had topped the list of attractions, after standing in third place in 2022. The second most visited UK attraction in 2024 was the Natural History Museum with 6,301,972 visitors, an increase of 11% on 2022. Of the top ten most visited attractions, nine were in London. However, the director of ALVA, Bernard Donoghue, did note that the post pandemic “recovery of visitor attractions and the broader cultural and heritage economies remains fragile”.

GLA Economics will continue to monitor these (and other) aspects of London’s economy over the coming months in our analysis and publications, which can be found on our publications page and on the London Datastore.