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Chancellor Rachel Reeves has ordered a £2bn Whitehall efficiency drive to help fill a hole in the public finances, but her fiscal problems could worsen in the medium term as she looks at making tax concessions to US President Donald Trump.
Reeves did not deny that the UK’s £800mn annual digital services tax is on the table in trade talks with the US, an attempt to minimise the impact on Britain of Trump’s new global tariffs, expected on April 2.
The chancellor has big fiscal problems ahead of her Spring Statement on Wednesday, after slow growth and rising borrowing costs left her facing a fiscal repair job of up to £15bn.
A £2bn cut to Whitehall administration costs by 2030 will help to close some of that gap, along with £5bn of welfare cuts announced last week. Departmental budgets will also be significantly squeezed to close the fiscal hole, as Reeves adjusts course to meet her self-imposed borrowing rules.
Reeves and Pat McFadden, Cabinet Office minister, will this week write to all departments to tell them to cut their administrative budgets by 15 per cent by 2029-30. McFadden has spoken of the need for a “more agile state”.
Reeves has said a better use of technology and cuts in the use of consultants, as well as budgets for communications and travel could be part of a package to ensure money is better spent on front line services.
The Cabinet Office said: “We cannot stick to business as usual. By cutting administrative costs we can target resources at frontline services.”
Dave Penman, head of the FDA civil service union, warned that the cuts could lead to big job losses and harm public services. “The idea that cuts of this scale can be delivered by cutting HR and comms teams is for the birds,” he said.
However, Reeves’ fiscal dilemma could further intensify later in the year if Britain offers to water down or even scrap its digital services tax, a levy that has drawn the ire of US tech firms and the Trump administration.
The Financial Times revealed last week that the levy, expected to raise £800mn this year, was on the table in talks with the US aimed at minimising any tariffs levied on the UK by Trump from April 2.
The chancellor, speaking to the BBC, did not deny that the tax was being discussed but said: “Let’s see how that progresses in the coming days.”
She insisted that it was “the right thing that companies who operate in the UK pay their taxes in the UK”, but added: “We are in discussion at the moment around a whole range of things relating to tariffs with the US.”
British officials say that the UK and US are close to drawing up “heads of agreement” on a deal that would initially focus on technology co-operation and are racing to complete it before April 2.
However, Treasury officials said any deal would not be covered by Reeves in her Spring Statement.
Britain’s digital services tax, which hits US tech giants including Alphabet, Meta and Amazon, was introduced by the former Conservative government in April 2020 to ensure that global digital businesses paid tax that reflected the value they derive from UK customers.
The flat rate 2 per cent tax is applied to companies that have global revenues in excess of £500mn, and is applied on revenues derived from the UK.
But any suggestion that Britain is offering tax concessions to US tech giants while simultaneously slashing welfare spending and other areas of public spending could be politically toxic.
Daisy Cooper, Liberal Democrat Treasury spokeswoman, said: “It would be tantamount to robbing disabled people to appease Musk and Trump. The government should be standing up for the British people not bowing down to Trump and his US billionaire cronies.”
Reeves’ statement on Wednesday — expected to last between 20-30 minutes — will be framed by the chancellor as her response to a “changing world”, but opponents will argue it is an admission of economic failure.
A worsening economic outlook has wiped out the £9.9bn of headroom she gave herself in her October Budget against her key fiscal rule, which says current spending must be in balance with tax receipts by 2029-30.
Government officials say higher borrowing costs and sluggish growth have left Reeves needing to find between £10bn-£15bn. Welfare savings will amount to £5bn of that total, while switching spending from overseas aid to a capital-heavy defence budget will give about £2bn of extra flexibility. A crackdown on tax compliance could win her £1bn in the Office for Budget Responsibility’s forecasts on Wednesday.
Most of the rest of the shortfall will have to be made up of squeezes to departmental spending later in the parliament, as well as savings in the Whitehall efficiency budgets confirmed on Sunday.
