Rachel Reeves will deliver the Spring Statement on 26 March, with the Chancellor facing a precarious balancing act.
Having previously insisted this slimmed-down version of the Budget would not contain any big changes, lots has happened since the autumn and there has been growing speculation that the government might need to make some bigger tweaks to raise tax revenue, particularly in light of Kier Starmer's recent defence spending pledges and the narrow amount of fiscal headroom.
Loud bleating from the retail and other sectors about higher labour costs might also be addressed in some way.
Fresh forecasts from the Office for Budget Responsibility (OBR) are likely to show Reeve's fiscal headroom has shrunk from October’s £9.9 billion to just £3 billion, economists said.
While the near-term growth outlook is likely to be downbeat, some indicators offer a glimmer of optimism. Lower energy prices, improving labour market participation, and stabilising asset prices suggest the UK economy is weathering recent turbulence better than feared.
Fiscal constraints remain severe but falling energy prices might offer some relief. "Directionally encouraging, but not game-changing for the public finances," said Simon French, chief economist at Panmure Liberum, noting that any gains may be offset by weaker oil and gas tax revenues.
Tax receipts have undershot forecasts by £7.7 billion, despite GDP tracking close to OBR projections, he noted.
With limited room for manoeuvre, the Chancellor is likely to avoid major fiscal shifts. "Investors have bigger fish to fry right now," said French, suggesting that stability rather than bold policy moves may be the government’s best option in an increasingly uncertain global landscape.
The most recent public borrowing figures showed a net surplus of £15.4 billion for January, which fell short of the £20 billion estimated by the OBR in October alongside the Budget.
"That further raises the probability that Chancellor Rachel Reeves will need to scale back spending if she wants to avoid hiking taxes in her Spring Statement on 26 March," said currency strategist Francesco Pesole at ING.
"Remember that the fiscal headroom originally expected last autumn has been eroded by the rise in gilt yields," said Pesole.
"We think sterling is going to suffer from the March Budget event, also as the Bank of England could see lower spending as a reason to unlock more cuts in line with the recent dovish shift in the Monetary Policy Committee".
Charlotte Sallabank, partner at Katten Muchin Rosenman, said: "Whether Rachel Reeves will alleviate concerns from employers about higher labour costs and lower-than-expected growth remains to be seen.
"Though there has been no indication of major changes in this area, providing employers with some relief, for example by increasing employment allowance, could be a good opportunity to use the Spring Statement to regain some public support.”
She said Reeves’ comments at the World Economic Forum in Davos suggest that the Spring Statement will contain adjustments to allow easier access to the Temporary Repatriation Facility (TRF), which offers certain benefits or exemptions for repatriating funds or assets to the UK.
"It appears more likely that these changes will involve tweaks to the Finance Bill, but there is a possibility that the Chancellor may use the Spring Statement to rework the TRF regime more extensively."
Sallabank also noted the "mounting pressure" on the Chancellor to modify the new foreign income and gains regime, and "it is possible" that Reeves may see the mini fiscal event as an opportunity to address the calls for an extension of the four-year FIG period.
The four-year FIG period is the time frame in which certain foreign income or gains are treated differently for tax purposes on income and gains earned outside the UK.