Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Rachel Reeves’ Spring Statement on Wednesday is expected to last only about 25 minutes but she will have a lot of bad news to fit in. The problem for the chancellor is that, over the coming months, things could get even worse.
Reeves will keep her statement to MPs short and to the point, but it will be written in red ink. She is expected to reveal that sluggish economic growth and rising borrowing costs have forced the Treasury into a fiscal repair job approaching £15bn.
Reeves will publish two politically toxic documents; the first is a gloomy forecast from the Office for Budget Responsibility, which is expected to roughly halve Britain’s expected growth in 2025 from 2 per cent to about 1 per cent.
It is also expected to show that Reeves’ £9.9bn of headroom against her fiscal rule — which requires her to balance current spending with tax receipts by 2029-30 — has been wiped out, leaving her about £4bn in the red, according to people familiar with the forecast.
Amid the welter of economic data, Reeves will also publish a government impact assessment of how £5bn of welfare cuts announced last week will affect the lives of the constituents of anxious Labour MPs sitting behind her in the House of Commons.
Then there are expected to be more than £5bn of extra cuts to public spending, prompting shadow business secretary Andrew Griffith to claim Reeves was overseeing “austerity, just with a different name, a different face”. The Treasury declined to comment on Spring Statement “speculation”.
“The world is changing” has become Reeves’ mantra as the financial statement nears, but she does not mean it is changing for the better. US President Donald Trump has ushered in both an era of trade wars and a requirement for Britain to rapidly re-arm.
The question for Reeves and the country is whether the Spring Statement, gloomy though it is certain to be, is only a harbinger of an even more difficult full Budget in the autumn.
“We think there is going to be a bigger rethink of fiscal policy in the autumn, and this buys them time to have that discussion,” said Andrew Goodwin, economist at advisory firm Oxford Economics. “This is a kicking-the-can exercise.”
Reeves is overseeing a flatlining economy in which, next month, the £25bn rise in employers’ national insurance contributions she announced in last year’s October Budget will be delivered.
The tax rise, strongly criticised by business groups, will take effect days after Trump’s “world tariff day” on April 2. Even if Britain is spared the most punitive tariffs, Reeves has conceded that an escalating global trade war will create economic “headwinds”.
Then comes the political battle of persuading Labour MPs to vote for a £5bn package of welfare savings. Most accept that reform of health and sickness benefits is badly needed, but backing the cuts will still be painful.
Ministers meanwhile showed signs of unrest at a recent cabinet meeting as they came to terms with what will be an even tighter spending review, which will allocate scarce resources to Whitehall departments in June.
Reeves will not loosen her fiscal rules to allow extra borrowing to take the strain. “The markets would kill us,” said one Labour official. But if she needs to tighten the purse strings again in the autumn, even deeper spending cuts will be politically difficult to deliver.
Some economists expect the chancellor’s likely response to more bad news later in the year will be further tax rises. James Smith, UK economist at ING, said tax increases already looked “inevitable” given the demands for higher spending on services.
Among the obvious challenges are the need to lift defence spending beyond the 2.5 per cent of GDP that Prime Minister Sir Keir Starmer said he would finance by cutting overseas development aid.
“The public finances are operating on increasingly fine margins, at a time where spending pressures are far from diminishing,” Smith said.
A further fiscal hazard lying ahead stems from poor productivity growth. The OBR has been criticised for its persistent optimism about the UK’s potential productivity outlook, but lacklustre data in recent months could force the fiscal watchdog to pare back its numbers, economists have warned.
The OBR expects potential productivity growth to reach 1.2 per cent in 2029, the final year of its medium-term forecast. In its most recent outlook this month, the Bank of England estimated potential productivity growth of just 0.7 per cent in 2027, the final year of its forecast.
Citigroup analysts estimate that a reduction of just 0.1 percentage point in the OBR’s potential productivity growth forecast would create a hole of between £7bn and £8bn in the public finances.
Reeves will try to look on the bright side on Wednesday, claiming that Britain is “uniquely positioned” to pursue favourable trading relations with the US and EU, thanks to Starmer’s deft diplomacy.
She will insist that she is continuing to invest in capital projects and pursuing a growth policy of deregulation and reforms to planning and the civil service.
But the Spring Statement could come to be as seen as a holding operation — a patching-up of the public finances — ahead of more radical surgery later this year.
