Spring Statement: Reeves reaping the benefits of stability but Labour must survive Gorton & Denton by-election first

The UK Spring Statement to be delivered on Tuesday, 3 March, provides the Chancellor with a chance to showcase the benefits of a more stable backdrop to the UK’s public finances despite concerns about the overall health of the economy. Against the backdrop of the Gorton and Denton by-election tomorrow (26 Feb), which Labour could well lose not to Reform but to the leftist Greens, this could be a useful exercise in being boring and responsible.

Scenario: Labour loses to the Greens, fuelling calls from the left of the party to replace prime minister Keir Starmer. Rampant speculation over the weekend drives uncertainty with gilts hit on Mondaybefore Tuesday’s Spring Statement provides the ideal platform for the leadership to showcase its fiscal credentials. Once more fears of an attack by bond vigilantes is just enough to keep the PM in his job.

Spring Statement backdrop

No major changes are expected – the government has moved to make major announcements only once a year, usually at the autumn Budget. This will reduce the ongoing speculation over fiscal policy that has fed business and investment uncertainty. As such, don’t expect fireworks or any rabbits in the hat. Instead, the Spring Statement will outline the latest forecasts from the Office for Budget Responsibility.

Chancellor Rachel Reeves will seek to show the benefits of a prudent, stable approach pursued by Reeves against calls within the Labour party to spend more and not be ‘in hock’ to the bond market.

Reeves can point to the actions she took at the last Budget as paying dividends. UK Gilt yields have continued to fall after a brief spike ahead of the November set piece, with the 10yr yield lately touching its lowest in over a year at 4.3%. Lowering borrowing costs by assuaging bond markets with relative fiscal restraint is a key part of the government’s attempt to meet fiscal rules and bring down the deficit. Show you can do one and the other naturally follows. From a position of being a relative outlier among developed nations with the highest borrowing costs in the G7 the UK looks to have moved significantly closer to peers. 

Part of this is down to the sharp decline in inflation, which is now seen hitting 2% by April after declining more than expected last month to 3%. 

Reeves can also point to a borrowing boost with ONS estimates showing that the public sector recorded a £30.37 billion surplus in January, the highest surplus in any month since records began in 1993 and well above the OBR’s forecast of £24bn. The figure also means that the deficit for the first 10 months of the year was £112.1bn, significantly below the £120.4bn forecast by the OBR. Although January is usually a surplus month due to the receipt of self-assessment tax payments, it does signal a move in the right direction over the course of the entire year.

There have also been signs of a pickup in activity since the Budget – another signpost for Reeves to point towards as a sign her plan is working. The flash PMI survey for February posted its best reading since April 2024. 

Concerns about the economy aren’t going away 

The UK economy grew by 1.3% last year, driven largely by the services sector (up 1.4%). Real GDP increased by just 0.1% in the final quarter, with production up 1.2% but construction falling 2.1%.In the Budget, the Office for Budget Responsibility’s (OBR) GDP growth forecast was 1.4% in 2026 and 1.5% in 2027. Real GDP is in decline, a major worry.

Meanwhile unemployment continues to rise, partly as a result of the government’s hikes to National Insurance and the minimum wage. The unemployment rate hit 5.2% in the three months to December, the highest rate for nearly five years.

And it could get a lot worse. We note JPMorgan estimates unemployment hitting a rate of 5.5% by the summer, surpassing the pandemic peak. Much of the rise in unemployment is ascribed to tax hikes – buying bond market credibility at the expense of people’s jobs is not something that plays well with voters or the Labour party.

Gorton and Denton test comes first

To which we can turn our attention to something altogether more pressing for government – Thursday's Gorton and Denton by-election. Polls suggest it’s a tight three-way race between the Greens, Reform and Labour. The worry for the government is surge in support for the Green party, which is hiving off previous Labour supporters. it's too close to call right now.

A loss for the government in a traditional safe Labour seat could reignite doubts about the leadership and unlock unrest among backbenchers once more. This therefore presents potential headline risk to gilts and sterling on Friday, though so far Starmer has been adept at fending off attempts to dislodge him.

I would reiterate that the market would likely become worried about the Starmer-Reeves leadership should the result a) go against Labour and b) raise fresh speculation about the leadership among MPs. 

Any replacement of the Starmer-Reeves regime would be from the left, implying more spending and potentially unwinding all the fiscal repairs carried out at the last Budget. 

In the Budget last November, the chancellor’s move to raise taxes and fiscal headroom eased concerns about debt sustainability and immediate fiscal risks. Reeves is seen as the most ‘market-friendly’ possible candidate as Chancellor within the government.

That should make for a pretty boring Spring Statement, but only if Starmer can get through the Gorton and Denton test first. If not, the Spring Statement could be just what the government needs to soothe market worries.