With the Spring Statement scheduled for 12:30 GMT, Chancellor of the Exchequer Rachel Reeves faces limited flexibility in managing public finances. While tax increases are unlikely, spending cuts are set to intensify, targeting an additional GBP 500bn in savings to stabilize the budget.

Investors will be closely monitoring the Office for Budget Responsibility (OBR)‘s latest forecasts, with expectations of a downward revision to near-term UK growth and an upward adjustment to inflation projections. The ability of the Treasury to maintain credibility in adhering to fiscal rules remains a key concern amid rising debt servicing costs and weaker tax revenues.

Banking Sector Views:

Barclays: “We foresee a GBP 10bn fiscal adjustment, largely deferred beyond 2027 to avoid excessive pressure on near-term growth. Taking into account the current borrowing overshoot and higher interest rate environment, we estimate Public Sector Net Borrowing (PSNB) at 4.9% of GDP for the current fiscal year and 3.6% for FY25-26.”

Morgan Stanley: “We estimate a GBP 321bn gross financing requirement, with some upside risk. We expect Chancellor Reeves to restore GBP 10bn in fiscal headroom mainly through spending reductions rather than revenue-raising measures.”

Daiwa Capital Markets: “After the October budget left only GBP 10bn in fiscal headroom by FY29-30, higher gilt yields and sluggish economic growth have all but eroded that margin. February’s public finance figures revealed a GBP 20bn borrowing overshoot. To stay within fiscal rules, Reeves is likely to tighten spending, including welfare reductions and a shrinking civil service workforce. Additionally, the DMO is expected to shift toward issuing more short-term gilts to manage borrowing requirements.”

Deutsche Bank: “Markets will scrutinize three main areas: (1) the size and structure of the 2025/26 gilt remit, (2) updates on available fiscal headroom, and (3) the credibility of medium-term fiscal consolidation.

We project total gilt issuance at GBP 302bn, though the latest fiscal data suggests potential upside risks. Investors will be particularly focused on how the DMO allocates issuance, especially regarding long-dated gilts.”

Rabobank: “A reduction in OBR’s UK GDP growth forecast is widely anticipated, likely bringing the 2025 projection closer to 1%, aligning with Bloomberg’s economist survey. Since Labour’s election victory last July, economic activity has stagnated, and tax revenues have fallen short by GBP 11.4bn in February. Government cost-saving measures, including welfare and public sector cuts, may not be sufficient without a stronger economic recovery, raising the likelihood of tax increases later in the year.”

Nomura: “Markets, not fiscal rules, will ultimately determine the sustainability of the UK’s fiscal path. The 2022 Truss-Kwarteng episode demonstrated the consequences of policy missteps—loosening fiscal policy without market confidence can lead to surging borrowing costs. Reeves is expected to maintain strict adherence to fiscal discipline to preserve investor trust.”

Gilt Issuance Outlook: For the first time, the DMO is releasing an estimate for FY 2025-26. Current projections indicate a GBP 310bn net financing requirement, with GBP 305bn raised via gilt issuance (up from GBP 297bn in the current year) and GBP 5bn from T-bill sales (compared to GBP 3bn previously). Issuance is expected to increase marginally, particularly for shorter-duration gilts, to accommodate fiscal constraints.

With limited room for maneuver, Chancellor Reeves’ Spring Statement will be closely watched for signals on the UK’s fiscal strategy. Investors will assess the extent to which spending cuts, borrowing plans, and revised growth forecasts impact market sentiment and economic confidence.