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Response to the 2025 Spring Statement - NIESR
The macroeconomic impact of changes to welfare policy is mixed and will very much depend on key assumptions. A decrease in transfers will decrease consumption expenditure in the economy, pushing aggregate demand down. However, if the policy does produce an employment effect as the government hopes, this will provide a boost both to the economy, as a larger workforce leads to greater output, and to government revenue as more employment leads to higher tax revenue.
The increase in defence expenditure, as an investment in the UK economy, will have a positive effect on real GDP, both in the short and long run. In the short run, the expansion of investment will boost the demand side of the economy, while in the long run the boost to the economy’s capital stock will have positive supply side implications. However, this increase in expenditure is offset by a decrease in Overseas Development Aid (ODA), bringing it down to 0.3 per cent of GNI. NIESR has previously shown that an increase in international aid makes good macroeconomic sense, as every ？1 spent on aid delivers at least triple its value in the recipient countries, as well as boosting UK exports and providing positive spill overs to the international economy.
Should there be further economic shocks and/or an unfavourable forecast revision between now and Autumn ？ both entirely possible ？ the Chancellor may be inclined, obligated even, to continue playing fiscal cat and mouse come the Autumn Budget, which would distract from addressing material problems such as living standards, the green transition, and stagnant productivity.
Fixating on the details of fiscal bookkeeping detracts from the wider problem: the current fiscal framework is not fit for purpose. It is not plausible that, in meeting the fiscal rules by such a thin margin, the UK public finances are on a more sustainable path than they were yesterday. One must therefore question the extent to which the current fiscal framework, which is demonstrably prone to peripheral budget tinkering, can credibly discipline the long-run sustainability of public finances
The increase in defence expenditure, as an investment in the UK economy, will have a positive effect on real GDP, both in the short and long run. In the short run, the expansion of investment will boost the demand side of the economy, while in the long run the boost to the economy’s capital stock will have positive supply side implications. However, this increase in expenditure is offset by a decrease in Overseas Development Aid (ODA), bringing it down to 0.3 per cent of GNI. NIESR has previously shown that an increase in international aid makes good macroeconomic sense, as every ？1 spent on aid delivers at least triple its value in the recipient countries, as well as boosting UK exports and providing positive spill overs to the international economy.
Should there be further economic shocks and/or an unfavourable forecast revision between now and Autumn ？ both entirely possible ？ the Chancellor may be inclined, obligated even, to continue playing fiscal cat and mouse come the Autumn Budget, which would distract from addressing material problems such as living standards, the green transition, and stagnant productivity.
Fixating on the details of fiscal bookkeeping detracts from the wider problem: the current fiscal framework is not fit for purpose. It is not plausible that, in meeting the fiscal rules by such a thin margin, the UK public finances are on a more sustainable path than they were yesterday. One must therefore question the extent to which the current fiscal framework, which is demonstrably prone to peripheral budget tinkering, can credibly discipline the long-run sustainability of public finances
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