Spring statement austerity measures could hit GDP by up to £12.6bn by 2029/30, wiping out savings from benefit reforms
The cost of poverty and public service cuts are likely to spill over and damage growth
26 March 2025
Austerity measures announced in today’s spring statement [Wednesday 26 March] are likely to damage growth enough to wipe out the £4.8bn savings from social security reforms, analysis by the New Economics Foundation (NEF) finds.
The chancellor Rachel Reeves today announced savings worth £8.4bn across universal credit, personal independence payments and departmental current budgets in response to the Office for Budget Responsibility’s (OBR) forecasts. If these cuts have a persistent negative effect on growth, such as through reduced demand and increased poverty, then GDP could be up to £12.6bn lower by 2029 – 30.
This would have a knock-on effect on the government’s fiscal headroom, reducing it by £5.8bn. This would be more than enough to completely wipe out the £4.8bn savings made from welfare reform in the spring statement.
NEF’s calculations are based on the negative impact previous austerity had on growth, as measured in IMF and academic research. NEF analysis using this research suggests a cut of £8.4bn can have a permanent negative impact on GDP between £8.4 – 12.6bn.
Dominic Caddick, economist at NEF, said:
“Rachel Reeves’ spring statement is built on shaky foundations. If her £8.4bn cuts to welfare and public services damage growth like the austerity before it, then her so-called headroom will be wiped out, ushering in further rounds of austerity.
“To end this austerity doom-loop the chancellor must abandon fiscal rules based on arbitrary targets and reform the OBR to assess her policies in a way that properly reflects underlying uncertainty.
“Only a change to our fiscal rule framework and the OBR that assess it will offer the Chancellor the opportunity to invest properly in the things that will improve people’s lives and revitalise our economy.”
ENDS
Contact
James Rush /james.rush@neweconomics.org
Notes
New Economics Foundation analysis of Office for Budget Responsibility (OBR) data.
We calculate an effect of £8.4bn austerity cuts in 2029/30 using fiscal multipliers of 1.0 – 1.5 on GDP, leading to a negative impact on GDP between £8.4 – 12.6bn. This reflects IMF and academic research hyperlinked.
The OBR economic and fiscal outlook calculates that a 0.13 percentage point fall in nominal GDP growth per year will wipe out the Chancellor’s headroom. We use this to impute a linear relationship between GDP loss and fiscal headroom.
By combining the multiplier effect of austerity on GDP with the OBR’s implicit impact of GDP changes on headroom we estimate the savings that would be wiped out from a drop in GDP caused by austerity.
NEF is a charitable think tank. We are independent of political parties and committed to being transparent about how we are funded.
