Chancellor lining up billions in spending cuts as fiscal headroom wiped out
The Chancellor Rachel Reeves is preparing to announce “major measures” including substantial spending cuts to a number of government departments – including welfare – in the Spring Statement.
According to BBC News, sources said that “the world has changed” since the Budget, and that £9.9bn in fiscal headroom projected by the Office for Budget Responsibility (OBR) in October is likely gone.
In a government forecast from December announcing the date of the Spring Statement, the Treasury said: “The Chancellor remains committed to one major fiscal event a year”.
However, knock-on effects from Trump administration tariffs, higher borrowing costs, weak economic growth and stubbornly high inflation could make this fiscal event more sweeping than initially anticipated.
The OBR is set to publish a forecast ahead of the Spring Statement.
Reeves has previously said that her self-imposed fiscal rules are “non-negotiable”, with spending cuts now one of the few levers left available for the government. Many economists warn some form of tax rises could be on the cards, with the PM and Chancellor both failing to rule out such an approach.
A speech from Work and Pensions Secretary Liz Kendall is imminent, with efforts underway in Whitehall to convince the OBR that government plans to get sickness benefits claimants back into work will boost tax revenue.
Lindsay James, investment strategist at Quilter, said: “With fiscal headroom, the buffer the government has against its self-imposed fiscal rules, highly sensitive to changes in growth expectations, it is likely that the previous £9.9bn of headroom will be wiped out as a result, requiring either tax hikes or spending cuts.”
“However, the savings required are of a size that she is likely to have to go to a range of government departments to find savings in order to remain within fiscal rules.”
Cuts to welfare are one of a number of politically painful cuts being prepared, with the Cabinet Office minister and key Starmer ally Pat McFadden reportedly drawing up plans to trim spending to produce a more “agile” state.
Reeves could face a backlash from her own party over the scale of the anticipated cuts.
Anneliese Dodds, the former International Development Minister, resigned last week over cuts to the aid budget aimed at freeing up money for a defence spending boost to 2.5 per cent of GDP.
However, Politico reports that Dodds is now unlikely to make a statement in the Commons today at Prime Minister’s Questions.