A general view of the Houses of Parliament on March 28, 2019 in London, England.
Leon Neal | Getty Images
Britain’s Labour government will come under intense scrutiny on Wednesday, as Finance Minister Rachel Reeves prepares to update lawmakers on her spending and taxation plans and the nation’s economic outlook amid unsettling times for the U.K.
Reeves is expected to announce billions of pounds worth of spending cuts as a way to close a budget shortfall caused by a rise in borrowing costs since her first fiscal plan, released last fall.
The finance minister has already vowed to stick to her self-imposed “fiscal rules” set out in the “Autumn Budget” last October: to ensure that day-to-day spending is met by tax revenues and that public debt is falling as a share of economic output by 2029-30.
The U.K.’s finance minister’s Spring Statement, due to be presented in Parliament at 12.30 p.m. London time, will be delivered alongside the latest economic forecasts from the Office for Budget Responsibility (OBR), the country’s independent public finances watchdog.
The OBR is reportedly expected to downgrade the U.K.’s growth forecasts for 2025 and halve its previous 2% estimate, with lower output putting upward pressure on the government’s borrowing requirements and forcing Reeves to cut public spending by around £10 billion ($12.96 billion).
‘A changing world’
Since her initial budget was presented last October, Reeves has come under increasing pressure to cut public spending, raise taxes further or to bend the fiscal rules amid a rise in U.K. borrowing costs that analysts say has wiped out the “fiscal headroom” Reeves had within her initial budget.
The U.K. is also facing the specter of a temporary rise in the rate of inflation, according to the Bank of England, along with continuing economic sluggishness in recent months.
Reeves is widely expected to allude to the change in economic backdrop since her last budget statement, with uncertainty from U.S. President Donald Trump’s trade tariffs, seen to be inflationary, also posing a headwind for the economy.
The Treasury issued a press release Tuesday stating that Reeves would pledge to bring about “security and national renewal” in her Spring Statement that would, it said, be designed “to kickstart economic growth, protect working people and keep our country safe.”
Reeves will also warn that “we have to move quickly in a changing world” and is set to unveil a significant step towards spending 2.5% of GDP on defense with a £2.2 billion ($2.6 billion) funding boost next year, the Treasury said.
Britain’s Prime Minister Keir Starmer meets with Britain’s Chancellor of the Exchequer Rachel Reeves, days before the announcement on the first budget of the new Labour government, at Downing Street on October 28, 2024 in London, England. Starmer and Reeves are meeting ahead of the Budget on Wednesday.
Wpa Pool | Getty Images News | Getty Images
Reeves’ statement is expected to address the “erosion of fiscal headroom via tighter spending control,” Emily Nicol and Edward Maling at Daiwa Capital Markets noted.
“At the time of October’s Budget announcement, the OBR projected a current budget surplus in FY29/30 of about £10 billion, with that amount representing the government’s so-called ‘headroom’ for meeting its binding objective of a balanced current budget by that date. Today’s figures suggest that this has been more than wiped out,” they noted.
“With economic growth having recently been below the OBR’s expectation — and the OBR likely to roughly halve its 2.0%Y/Y GDP forecast for 2025 — the overshoot of public borrowing and undershoot of tax revenues relative to the OBR’s forecast might be considered in part due to cyclical weakness which might in due course correct automatically.”
The economists warned, however, that “the increase of about 20-40 basis points in gilt yields across much of the curve since mid-October will be considered by the OBR to be structural and will alongside certain other slippages — in the absence of offsetting new policies — likely have eroded the government’s headroom.”
Spending cuts ahead
The erosion of the Treasury’s fiscal headroom has prompted economists and analysts to widely bank on Reeves announcing billions of pounds in cost cuts on Wednesday.
The government has already flagged plans for £5 billion’s worth of welfare spending cuts, as well as intentions to reduce the administrative costs of the Civil Service, which implements government policies, by 15% by 2030.
“The Spring Statement will see an increase in required borrowing over the next two years due predominantly to higher interest payments. An updated OBR forecast will require the Chancellor to make back-loaded spending cuts of around £10 billon to retain her previous fiscal headroom,” Barclays Strategist Moyeen Islam and Chief U.K. Economist Jack Meaning said in analysis last week.
“These savings will most likely be focused on welfare spending and public sector headcount, and delayed until the second half of the parliament, beyond 2027,” they added.
Rachel Reeves, UK Finance Minister, speaking on CNBC’s Squawk Box outside the World Economic Forum in Davos, Switzerland on Jan. 22, 2025.
Gerry Miller | CNBC
Analysts at geopolitical consultancy Teneo agreed that while last October’s autumn budget saw £40 billion in targeted tax rises to finance public services, Reeves’ next statement “is likely to entail welfare spending cuts,” noting that “any additional (even limited) tax rises should be watched.”
“Some relief for employers could also arrive, following the controversial national insurance contribution hike in October. Overall, the statement will serve to underline the limited fiscal space as the search for growth and productivity continues, amid pressures for improved public services and greater defense spending,” Teneo analysts added.
A Treasury spokesperson told CNBC Tuesday that the Treasury would “not comment on speculation around OBR forecasts.”
“The Chancellor has also been clear that she would not repeat the likes of the October Budget and is now focused on growing the economy and rooting out waste in public spending through the Spending Review,” the spokesperson added.
Reeves has repeatedly commented that she would not abandon her fiscal rules or raise taxes further for now, although economists expect more levies could come later this year.
There was widespread consternation in the British business community last fall when she raised the tax burden on businesses and employers with the aim, she said, of plugging a hole in public finances and allowing for investment in public services.
British industry leaders warned that the Treasury’s fiscal plans could weigh on investment, jobs and growth, however.
Reeves defended the tax rises as a “one-off” measure and necessary to boost investment in public services. She has repeatedly stated that boosting U.K. growth is her number one priority and has vowed that she would not be loosening the fiscal rules or targets she has imposed on her department.
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