Rachel Reeves has told several Whitehall departments to prepare for their budgets to be frozen under ‘flat cash’ spending plans, it emerged last night.

With sluggish growth and high borrowing costs, the Chancellor is looking to squeeze spending by unprotected departments.

The Treasury has reportedly asked them to model ‘flat cash’ spending plans, which would see their budgets frozen in cash terms.

Departments are currently bidding for funds from 2026 to 2029 as part of a major spending review in June.

Health, education and defence budgets are protected, but other departments are facing estimated £9billion real-terms cuts in day-to-day spending, according to the Institute for Fiscal Studies.

One senior official at an unprotected department told Bloomberg that the Treasury had asked them to model ‘flat cash’ plans – suggesting there would be big cuts, once adjusted for inflation.

Another told the outlet that they were being asked to model cuts of three per cent to five per cent in real terms.

Flat cash budgets are when there is no additional funding for inflationary pressures.

With sluggish growth and high borrowing costs, Rachel Reeves (pictured) is looking to squeeze spending by unprotected departments

Ms Reeves has previously ruled out a return to austerity, describing ‘Conservative austerity’ as a ‘destructive choice for our public services – and for investment and growth too’.

But soaring interest rates and sluggish growth has led to warnings that the Chancellor could face a £20billion shortfall.

‘Higher borrowing costs are just the tip of the iceberg, and weak growth is instead the main concern,’ Allan Monks, an economist at JP Morgan, said last month.

‘Growth prospects have deteriorated in part due to tax hikes at the last Budget. That could leave a fiscal hole worth around £20billion that the government will need to plug in the spring.’

The Chancellor has also previously ruled out both increasing borrowing and raising taxes following the significant tax hikes in October’s Budget, leaving her with few options beyond further spending cuts.

Departments are currently bidding for funds from 2026 to 2029 as part of a major spending review in June (file photo)

She has given most departments more money for the next two years, but is planning cuts to many areas after that.

Any additional cash is expected to be swallowed by the NHS.

Responding to the Bloomberg reports last night, an HM Treasury spokesman said: ‘The Chancellor has asked all departments to deliver savings and efficiencies of 5 per cent of their current budget as part of the first zero-based Spending Review in seventeen years.

‘Every pound of government spending is being interrogated, to root out waste and get the best value for taxpayers as we deliver on their priorities set out in the Plan for Change.’

Sources stressed that any spending scenarios given to departments would not be the final allocations.