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UK chancellor Rachel Reeves is planning a new, multibillion-pound public spending squeeze in next week’s Spring Statement, following the announcement on Tuesday of £5bn in welfare cuts.
Reeves is looking for further cuts to fill a hole in the public finances and will trim proposed budgets for Whitehall departments later in the parliament, according to officials briefed on her plans.
Sir Keir Starmer, prime minister, has ruled out a return to “austerity” but officials say Reeves has always indicated she will “adjust” spending plans if the economic outlook worsened.
“The world is changing,” Reeves said this week.
After fuelling a short-term boost to spending with her £40bn of tax increases in October’s Budget, Reeves had pencilled in an average 1.3 per cent average rise in real departmental spending from 2026-27 onwards.
Curbing real-terms growth in day-to-day departmental spending to about 1.1 per cent would save the Treasury roughly £5bn a year by the end of the parliament, according to the Institute for Fiscal Studies, based on October’s inflation forecasts by the Office for Budget Responsibility.
This growth rate is still marginally above that implied in former chancellor Jeremy Hunt’s spending plans before the election.
Rising government borrowing costs and anaemic growth have blown a hole in Reeves’ plans; economists expect the worsening outlook to have eliminated most or all of the £9.9bn of headroom she had in order to meet her fiscal rules in the October Budget.
One government official said financial markets would expect Reeves to recreate a “reasonable level of headroom” in her Spring Statement on Wednesday next week; one fiscal rule says current spending must be matched by tax receipts in 2029-30.
Reeves has rejected calls by backbench Labour MPs to loosen the fiscal rules and her allies do not expect the chancellor to fill the gap with tax rises. That leaves a tighter spending squeeze on Whitehall departments that are already strapped for cash.
Last week a number of ministers protested about expenditure curbs at a cabinet meeting, but government insiders insist that focusing on reform means that public services can be maintained even if rates of spending growth are reduced.
Starmer last week promised better value for money with civil service reforms and deploying more technology. “Every pound spent, every regulation, every decision must deliver for working people,” he said.
Reeves risks being accused by leftwing Labour MPs of funding public services at a level comparable to that planned by Hunt — but her allies insist the chancellor has “credible plans” for getting better value for money.
“The difference is that we have set out plans on how we can make departments more productive and how we can reduce costs,” said one. “This isn’t a return to austerity.”
Reeves’ allies also argue that because she “front-loaded” spending to carry out urgent repairs to services, lower-than-expected growth in expenditure in later years will be easier to bear.
She warned this week Britain was facing tough times and that “increased global headwinds, such as trade uncertainty, are being felt across the board”.
Government officials say that US President Donald Trump’s trade wars could “blow all our plans off course”.
In October Reeves set departmental spending plans for 2025-26, with allocations for 2026-27 onwards due to be announced in June.
Reeves will gain some flexibility because of Starmer’s decision to raid the foreign aid budget to fund a £6bn-a-year rise in defence spending by 2027.
A portion of this spending is likely to be treated as capital expenditure, which does not count towards Reeves’ fiscal rule requiring her to record a current budget surplus in 2029-30.
Economists have stressed that to be credible with financial markets, the chancellor will need to start making savings within the period of the upcoming comprehensive spending review, rather than pencilling in steeper cuts towards the end of the parliament.
Ben Zaranko at the IFS think-tank said Reeves could stick with 1.3 per cent growth in real, annual departmental spending over three years and then pencil in “stonking cuts right at the end of the parliament”.
But this could elicit claims she was guilty of “fiscal fiction” — a critique of Hunt’s tight but unspecified spending plans, he added.
A Treasury spokesperson said: “The government’s commitment to fiscal rules and sound public finances is non-negotiable.
“As previously announced, the [OBR’s] next forecast will be presented to parliament on 26 March alongside a statement from the chancellor. We do not comment on speculation around OBR forecasts.”