Empty statements do little for the pound

The 2025 Spending Review, delivered by Chancellor Rachel Reeves today, presented a fiscal landscape of tight constraints and strategic reallocations.

Against the OBR’s subdued 1.0% GDP growth forecast for 2025 and a razor-thin £9.9 billion fiscal headroom, Reeves aimed for “stability” and “national renewal,” framing decisions for “working people.” Crucially, the immediate market reaction was minimal. Sterling showed little significant movement, suggesting the Chancellor achieved her primary objective: avoiding market upset.

As expected, the Chancellor announced that departmental spending would grow by 2.3% per year in real terms, unchanged from the Spring Statement.

Within this, Reeves confirmed a £30 billion NHS boost over three years, and increased defence spending to 2.6% of GDP by 2027. But with these two tweaks accounting for much of the Chancellor’s wiggle-room within her unchanged spending envelope, other changes amounted to a modest shuffling around of priorities, despite the likely protestations to the contrary.

Importantly, today’s announcements contained little new information. Many measures had been pre-announced, with most of the remainder leaked to the media over recent weeks.

That ensured investors found no immediate reasons for significant alarm or optimism, which we suspect was the Chancellor’s immediate aim. It also means the Reeves’ message was left lacking a forward-looking vision, once again passing up the opportunity to address fundamental economic issues.

This absence of a compelling growth narrative, while not an acute risk to the pound, remains a longer-term valuation headwind. As we see it, the Chancellor has done little to address the challenge of hitting her fiscal targets, and she will have to revisit this problem come the Autumn budget, unless markets panic sooner.

So, while we remain constructive around sterling upside longer-term, short-term risks favour a pullback from current levels at some point in the coming months, likely during the quieter summer period.

Author: 

Nick Rees, Head of Macro Research

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