Rachel Reeves promised “economic security in an uncertain world” as she delivered a spring statement that risked being swept away by the conflict in the Middle East.
The chancellor was addressing MPs against the backdrop of surging energy prices and rising government borrowing costs, as investors fret about the impact of the war in the Middle East. The cost of a barrel of Brent crude was up another 7.2% and gas by another 23%, with economists warning a prolonged spike in energy costs will feed through to higher prices for households and businesses.
Reeves said she was in close touch with the Bank of England governor, Andrew Bailey, as they monitored the situation and would meet representatives of the North Sea energy industry on Wednesday.
Reeves was responding to new forecasts from the independent Office for Budget Responsibility (OBR), drawn up before Israel and the US began their weekend assault on Iran, which the chancellor said showed “inflation is down, borrowing is down, living standards are up and the economy is growing”.
“This government has restored economic stability,” she said, in a deliberately low-key statement that, as expected, contained no substantive policy announcements.
Reeves conceded that GDP growth was now expected to be “slightly slower” this year, however, down to 1.1% from the previous forecast of 1.4%, after weaker than expected data in the final quarter of 2025 – but stronger in future years, at 1.6% in 2027 and 2028, and unchanged at 1.5% in 2029 and 2030.
The OBR also predicted that the unemployment rate, already almost at a five-year high, would continue rising to a peak of 5.3% this year – up from a previous estimate of 4.9%.
But underlining the fragility of its forecasts, the OBR warned the expanding Middle East conflict “could have very significant impacts on the global and UK economies”.
Despite instructing the OBR not to judge her against her fiscal rules at this spring forecast, Reeves emphasised that her buffer – or “headroom” – had increased in its latest projections to £23.6bn, from £21.7bn at the time of the November budget.
This improvement has been aided by lower gilt yields, or government borrowing costs, though these have been rising again in recent days as investors bet on resurgent inflation.
Analysts responding to Reeves’s statement warned that it rests on energy prices returning to normal levels.
Ruth Curtice, director of the Resolution Foundation, said: “The best news from today’s spring forecast was an outlook for lower inflation and interest rates, but sadly both already look out of date before the ink is dry on the OBR forecast. If overnight increases to oil and gas prices are sustained, we could see inflation back at 3% by the summer with typical energy bills £500 higher.”
Andrew Wishart, of Berenberg, said “the question overshadowing the event is whether the Iran conflict will end soon enough for the future OBR forecasts to be possible”.
“A prolonged conflict would cause much higher global energy prices to impart a fresh stagflationary shock to European energy importers including the UK,” he added.
The chancellor promised she would “chart a course through that uncertainty, secure our economy against shocks, and protect families from the uncertainty we see beyond our borders”. She added: “I am in no doubt about Britain’s ability to navigate the challenges we face.”
Markets have also been revising down expectations for more imminent interest rate cuts in recent days, as more costly energy will complicate the Bank of England’s task in tackling inflation.
Pointing the way to a possible fresh growth downgrade in the autumn, the OBR said it had revised down its near-term GDP forecast partly as a result of weaker-than-expected net migration, but it had not yet taken into account the tough new policies recently announced by the home secretary, Shabana Mahmood, including making refugee status temporary.
The shadow chancellor, Mel Stride, responding to Reeves’s statement in the House of Commons, accused her of “utter complacency”.
“She is rather like the dodgy estate agent standing in the crumbling building with a roof gone, the windows gone, with the floor gone and saying: ‘Just think of the potential,’” he said.
Reeves said the unstable global situation meant the actions she had taken on inflation, including shifting green levies to general taxation and freezing bus fares and prescription charges, were “even more crucial”.
And she hailed other recent Labour decisions, including removing the two-child cap on benefits, and funding 30 hours a week of free childcare.
Reeves promised to take more action on youth unemployment and inactivity in the weeks ahead, blaming her Conservative predecessors. “Young people in particular are still suffering from the aftermath of years of Tory mismanagement in the last five years of the previous government,” she said.
