The 2026 Spring Statement: Overview and Potential Implications for London

On 3^rd March 2026 the Chancellor of the Exchequer, Rachel Reeves, presented an update on the UK’s economic performance amidst growing national and international uncertainty. Concurrently, the Office for Budget Responsibility (OBR) published an update of its Economic and Fiscal Outlook [1]. This supplement summarises the key announcements made and potential implications for London’s economy.

Growth, inflation and interest rates

The OBR’s central real GDP and real GDP per person forecasts are similar to that in the November Budget, with small changes being caused by short-term weakness and recently-announced decreases in net migration. It has lowered its central forecast for overall net inward migration by around 60,000 people (50,000 adults) a year on average. Output growth in 2026 is projected to be slightly lower than what was in the November forecast as a result of the expected lower labour supply growth from reduced migration, but mechanically that leaves GDP per person unchanged. In its central forecast, real GDP growth slows from 1.4% in 2025 to 1.1% in 2026. The latter is 0.3 percentage points lower than the November forecast, reflecting weaker-than-expected GDP growth in late 2025, a looser labour market and subdued business surveys. It then picks up to average 1.6% between 2027 and 2030 as potential productivity gradually rises.

For Consumer Price Index (CPI) inflation, the OBR projects a decrease from 3.4% in 2025 to 2.3% in 2026, and 2.0% from 2027 onwards. It reaches the 2% target in late 2026. Additionally, food price inflation is expected to ease due to falls in global prices, while utilities inflation is forecast to fall due to decreases in wholesale energy prices and November 2025 Budget measures aimed at reducing energy bills.

The OBR also expects the benchmark interest rate to be lower than what was forecast in November across the forecast period. Its global growth forecast is in line with the International Monetary Fund’s projections at around 3% per year over the forecast period. It is important to note that this forecast was also conditioned on equity prices being higher now than they were back in November, energy prices being lower, Sterling’s effective exchange rate being higher, and on the policy measures announced in the most recent Budget. They do not account for the potential effects of the recent conflict in the Middle East or the US Supreme Court’s ruling against President Trump’s ‘Liberation Day’ tariffs.

Compared to the UK, London’s economy is more reliant on services, has higher overall productivity and is more open to international trade. Nevertheless, an overall national economic slowdown is likely to also induce a slowdown in the capital. Historically, London’s and the UK’s GDPs correlate relatively strongly. Therefore, London’s 2026 GDP growth rate is also likely to be lower than currently forecast. Meanwhile, should there be a prolonged conflict in the Middle East, energy prices are likely to remain high for longer, increasing inflation while depressing both consumer spending and business investment. As living costs in London are already higher than elsewhere in the UK, the impact on London’s households will be more severe, with households of protected characteristics most likely to be adversely affected. This would also make inflation more persistent, reducing the probability of further interest rate cuts. Other things equal, this would increase home ownership costs and add further pressure on both homeowners and renters in London (where private rentals comprise approximately one-third of all housing tenures).

Labour market

The OBR forecast notes that labour market conditions continue to loosen as the unemployment rate has risen, redundancy rates have increased, and private sector pay growth eased. In its central forecast, the unemployment rate rises from 4.75% in 2025 to a peak of 5.13% in 2026, driven by weaker demand for labour. After peaking in 2026, the unemployment rate is expected to then fall gradually to its estimated equilibrium rate of 4.1% in 2030. Compared to the November forecast, the OBR expects the unemployment rate to peak around 0.33 of a percentage point higher, consistent with surveys indicating weak expectations for employment growth.

Meanwhile, the looser labour market has started to weigh on real pay, with real weekly wage growth slowing to below 1% in late 2025 after averaging 2.5% in 2024. The slowdown has been in private sector pay growth, partly offset by stronger public sector pay growth. Nominal weekly wage growth is expected to slow to around 3.5% in 2026 and then average 2.25% a year, broadly in line with the November forecast.

Recent data from the Office for National Statistics (ONS) shows that for the November 2025-January 2026 period, London’s unemployment rate reached 7.9%, compared to the national rate of 5.2%. Both have experienced increases on the year – reflecting a looser labour market with fewer job vacancies. Data from HMRC’s PAYE-RTI dataset also points to London having the lowest growth in median monthly salary at 3.2%. The upward revision of the UK peak unemployment rate by the OBR would suggest that London is also likely to experience higher unemployment. This problem is compounded by the capital’s low year-on-year productivity growth, which undermines job creation and future economic growth. It is also worth noting that ONS data shows that London’s employment rate for people aged 16-64 (73.8%) remains slightly below the national rate (75.1%) for the November 2025-January 2026 period.

Household incomes and corporate profits

The central OBR forecast projects that real household disposable income will grow by less than 0.25% in 2025-26 as wage and investment income growth moderate, inflation remains above the Bank of England’s 2% target and net benefits and higher taxes drag on disposable incomes. Growth over the entire forecast period, however, is marginally higher than forecast back in November. As for corporate profits, it is projected that profits will recover only gradually (from 16% to 16.25% in 2030) as firms slowly rebuild margins.

As London faces higher cost-of-living related pressures than other UK regions, and Londoners are more likely to pay higher taxes on employment and other sources of income, real household disposable income in the capital is unlikely to grow by more than what the OBR projects nationally. This could not only undermine consumer sentiment, but it could also drag on London’s growth via lower consumer spending. Meanwhile, London firms continue to face pressures, including higher taxes, post-Brexit labour shortages and higher production costs; their profit margins are unlikely to experience significant growth vis-à-vis their national counterparts.

Housing

With respect to housing, the OBR expects house price inflation to average just over 2.5% over the rest of the forecast period, broadly in line with growth in average incomes. This is largely unchanged from the November forecast. That being said, the effective interest rate faced by mortgage holders is expected to rise from 4.1% to 4.5% on average over the remaining part of the forecast period. This is 0.3 percentage points lower than what it was in the November forecast.

Net additions to the UK housing stock are expected to fall from an average of 260,000 a year in the early 2020s to a low of 220,000 in 2026-27, as recent subdued housing starts feed through. The OBR then expects net additions to rise sharply to just over 305,000 by 2030-31, reflecting the impact of planning reforms.

As noted earlier, a higher effective interest rate faced by mortgage holders is likely to reverberate to the private rental sector, which is substantial in London. This is likely to impact at least two-thirds of Londoners who either own or rent privately. Prolonged inflation is likely to exacerbate this situation, as would failure to boost the capital’s housing stock. That said, efforts at planning reform could offset some of these pressures over the medium term.

Public sector receipts, expenditure and borrowing

Receipts

Total public sector receipts are forecast to rise as a share of the economy from 38.8% of GDP in 2024-25 (£1.1 trillion) to an expected 42.7% of GDP (£1.6 trillion) in 2030-31. Within this, National Accounts taxes as a share of GDP (the ‘tax take’) are forecast to increase from 34.5% of GDP in 2024-25 to a peak of 38.5% of GDP by the end of the forecast period. This increase is primarily driven by personal taxes, national insurance contributions (NICs) and capital taxes, with the rise in personal taxes in turn being driven by the increase in employer NICs announced in the October 2024 Budget and the continued freeze of income tax thresholds.

Compared to the November 2025 forecast, total public sector receipts are forecast to be £3.7b higher in 2025-26. This is mainly due to higher-than-expected self-assessment income tax and capital gains tax receipts received around the end of the January 2025 payment deadline. The difference compared to November then rises to reach £12b (0.3 per cent of GDP) higher in 2030-31.

Expenditure

Total public spending is forecast to increase from 44.0% of GDP in 2024-25 to reach 44.9% of GDP by 2027-28, before gradually declining to 44.3% of GDP by 2030-31. In absolute terms and as a share of GDP, the outlook for total public spending is broadly unchanged compared to the November 2025 forecast.

The real per-person value of Resource Departmental Expenditure Limit (RDEL) spending (i.e., day-to-day spending for UK government departments covering spending on public services) is projected to rise to the highest level for the past two decades, excluding the pandemic peak. It is around £100 a year higher than when the Treasury set the Spending Review envelopes alongside the March 2025 forecast. The initial June 2025 Spending Review plans implied real per-person resource spending of approximately £7,700 by 2028-29. Since then, a lower population growth forecast, largely due to lower projected net migration, has increased projected real spending per person to around £7,800 in 2028-29.

RDEL spending is projected to rise to £548b in 2026-27 and then grows at an average of 1.1% in real terms over the following two years, reaching £582b by 2028-29. Welfare spending is forecast to rise this year by £18b (5.8%) to £333b, or 10.9% of GDP. It is then forecast to rise in nominal terms by an average of £15b (4.1%) a year over the rest of the forecast period, reaching £407b (11.2% of GDP) in 2030-31. The main drivers of the projected increase in welfare spending over the forecast are higher spending on pensioner and health-related benefits.

Borrowing

Public sector net borrowing is forecast to fall from 5.2% of GDP (£153b) in 2024-25 to 4.3% of GDP (£133b) this year. In the OBR central forecast, it is then projected to fall annually to reach 1.6% of GDP (£59b) in the final year of the forecast. A principal driver for the drop is the growth in projected tax receipts. Borrowing in 2025-26 is forecast to be £5.5b lower than expected back in November. It is also forecast to be slightly lower than expected in November over the medium term, with the reduction peaking at £8b in 2030-31.

Nevertheless, public sector net debt is forecast to rise from 94.3% of GDP in 2025-26 to 96.3% of GDP in 2028-29. It is then projected to fall to 95.1% of GDP in the final year of the forecast. Compared to the November forecast, net debt is expected to be on average 0.7 percentage points lower, which predominantly reflects lower forecast borrowing.

As a region, London makes the greatest net fiscal contribution to the Exchequer, with the region responsible for the largest total tax receipts. Londoners are likely to be disproportionately affected by the increased tax take. As noted earlier, this is likely to lead to lower household disposable incomes in the capital at a time when cost-of-living pressures remain considerable and could worsen.

Concluding thoughts

The Spring Statement does not include major new announcements related to tax changes, public spending or policy initiatives. Nonetheless, it provided the OBR the opportunity to update its forecasts in light of more recent data on immigration trends, GDP and other important parameters.

The updated forecasts do not present a different picture of the UK’s future economic situation. The country continues to suffer from feeble productivity and economic growth, inflation remains higher than the 2% target, the national debt remains relatively high, and the tax take is high by historical standards. Moreover, the forecasts do not factor in the potentially adverse effects of recent events such as the Middle East conflict and the Supreme Court’s decision on President Trump’s tariffs.

All this points to a precarious economic environment for both London and the UK, with the capital potentially bearing a disproportionate burden of any resulting inflationary pressures and economic slowdown.