Where else will the axe fall as the economy stalls? Rachel Reeves ‘must still slash £10bn from spending’ in Spring Statement next week despite Labour uproar at crackdown on benefits_Nhy
Rachel Reeves still faces making deep cuts in spending next week despite Labour‘s curbs on benefits.
The Chancellor’s Spring Statement next Wednesday had originally been billed as a low-key update, after she vowed only to hold one Budget a year.
However, the UK’s economic slowdown – partly blamed on the huge tax raid on business as well as Trump’s trade war – and rising debt costs have wreaked havoc with her plans.
Before the welfare reforms unveiled yesterday, Ms Reeves was thought to have a black hole of between £15billion and £20billion to fill in the public finances.
That means even if the Treasury’s OBR watchdog agrees that the benefits changes save £5billion significant extra action will be needed.
Ms Reeves has ruled out more borrowing or tweaks to the main tax rates, leaving spending cuts her only option despite Labour complaints about a return to ‘austerity’.
Rachel Reeves’ Spring Statement next Wednesday had originally been billed as a low-key update, after she vowed only to hold one Budget a year
The Chancellor’s task has been made harder by grim economic growth figures
Unprotected departments have been told to model reductions of up to 11 per cent in real-terms ahead of the Spending Review in the summer.
The OBR estimated at the Budget in October that the government had headroom of around £10billion for meeting its fiscal rules.
They are that day-to-day spending must be paid for by revenue, not borrowing, and to have debt falling as a share of national income by 2028-29.
However, that headroom is thought to have been completely wiped out. Economists believe that up to £20billion of spending or revenue-raising will be needed to rebuild a credible buffer.
There is speculation that some of the difference can be made up because parts of the aid money diverted to defence can be classified as capital spending – which does not count for the rules.
The respected IFS think-tank has estimated that limiting real-terms growth in day-to-day departmental spending to 1.1 per cent would save roughly £5billion a year by the end of the parliament.
One government official told the Financial Times that financial markets will expect Reeves to re-establish a ‘reasonable level of headroom’.
Some expect Ms Reeves will also ‘backload’ deeper cuts to the end of the OBR’s forecast period, effectively gambling that the picture will look better later on and they can be abandoned.
The Chancellor set out departmental spending plans for 2025-26 in October, with allocations for 2026-27 onwards due to be finalised in June.
Labour MPs have been up in arms over the Government’s benefits cuts, despite ministers making the ‘moral’ case that those who ‘can work should work’.
Keir Starmer has batted away criticism that policies now amount to ‘austerity’, insisting efficiencies can prop up services.
