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Rachel Reeves laid out a fresh wave of spending cuts to offset stalling growth today as she battles to balance the government’s books.
The Chancellor stressed the grim realities facing the country as she delivered her Spring Statement to the Commons, arguing the ‘world has changed’.
She said she was ‘proud’ of her track record despite having a £14illion black hole in the finances to fill, after her huge tax-and-spend Autumn Budget was followed by an economic slowdown.
However, she admitted the OBR watchdog has slashed growth forecasts in half, to just 1 per cent this year. It expects inflation to average 3.2 per cent this year, instead of the 2.5 per cent it anticipated in October, and progress on productivity will be lower.
The gloomy picture had put Ms Reeves on track to break her own ‘fiscal rules’ before she scrambled to make up the shortfall – saying it would be from spending cuts instead of even more tax rises at this stage.
Meanwhile, Ms Reeves confirmed she had suffered another major setback with the OBR rejecting the previously-claimed £5billion of savings from benefits reforms.
Instead they have been valued at more like £3billion – sparking a frantic last-ditch effort to find more cuts despite mounting fury from Labour MPs. Another £400million is apparently being trimmed from welfare, taking the final expected savings to £3.4billion.
The bungled process triggered an extraordinary blame game, with claims late tweaks meant the proposals were not given to the OBR in time before they were laid out to the Commons by Liz Kendall last week.
On a day that could define the Labour government:
- Ms Reeves said the OBR forecast there would now be a deficit of £4.1 billion in 2029-30 without taking action, rather than the £9.9billion headroom it previously expected;
- The Chancellor said she was bringing in measures that restored that headroom, meaning a £14billion package;
- Debt interest costs are set to be £105.2billion in the current financial year, more than the Government allocates on defence, the Home Office and justice combined;
- The OBR said growth would recover in future years but expansion would still be 0.5 percentage points smaller between 2023 and 2029 than it anticipated in October;
- That is partly as a result of starting from a lower base, although the watchdog said planning reforms were making a ‘modest’ contribution to growth;
- There was a glimmer of good news for Ms Reeves as headline CPI inflation eased to 2.8 per cent – slightly lower than had been pencilled in by analysts;
- The government is facing renewed unrest on Labour benches over ‘austerity’ and benefits cuts, with whispers about ministers resigning;
- Keir Starmer insisted the government will go ‘further and faster’ on the economy after a ‘decade of stagnation’, saying he has ‘full confidence in the Chancellor’.
Chancellor Rachel Reeves stressed the grim realities facing the country as she delivered her Spring Statement to the Commons, arguing the ‘world has changed’
The OBR previously estimated that growth would be around 2 per cent this year
Public sector borrowing has been running above the OBR’s forecasts from October
At PMQs before the statement Keir Starmer insisted the government will go ‘further and faster’ on the economy
The OBR is said to have batted away the government’s estimate that reforms of work and disability handouts can curb £5billion from costs. Pictured, Work and Pensions Secretary Liz Kendall arrives at Cabinet today
The package – formally signed off by Cabinet this morning – had originally been scheduled as a routine update on the public finances.
But the Tories claim it is now effectively an ‘Emergency Budget’ with the government needing a huge change in strategy.
Ms Reeves announced plans to tell Whitehall departments to cut administrative budgets by 15 per cent, expected to save £2.2billion a year by 2029-30.
Real-terms increases in departmental budgets are being scaled back sharply, although specific decisions will not be made until the Spending Review is finalised in June.
Laying out its views of the risks, the OBR report said: ‘Significant uncertainty surrounds domestic and global economic developments.
‘If the projected recovery in UK productivity growth fails to materialise, and it continues to track its recent trend, then output would be 3.2 per cent lower and the current budget would be 1.4 per cent of GDP in deficit by the end of the decade.
‘A 0.6 percentage point increase in Bank Rate and gilt yield expectations across the forecast would eliminate current balance headroom.
‘And if global trade disputes escalate to include 20 percentage point rises in tariffs between the USA and the rest of the world, this could reduce UK GDP by a peak of 1 per cent and reduce the current surplus in the target year to almost zero.’
In a thinly veiled swipe at Donald Trump, the Chancellor tried to blame global challenges for the British economy’s stuttering performance on her watch.
‘We can see that the world is changing, and part of that change is increases globally in the cost of government borrowing – and Britain has not been immune from those challenges,’ she said.
Ms Reeves said Universal Credit standard allowance will increase from £92 per week in 2025-26, to £106 per week by 2029-30, Rachel Reeves told the Commons.
The Chancellor added that the Universal Credit health element will be cut by 50% and frozen for new claimants.
She said: ‘The OBR (Office for Budget Responsibility) have said that they estimate the package will save £4.8 billion in the welfare budget, reflecting their judgments on behavioural effects and wider factors.
‘This also reflects final adjustments to the overall package, consistent with the Secretary of State’s statement last week and the Government’s Pathways to Work Green Paper.
‘The universal credit standard allowance will increase from £92 per week in 2025-26 to £106 per week by 2029-30, while the universal credit health element will be cut by 50% and then frozen for new claimants.’
But a damaging poll has revealed that most voters no longer believe Ms Reeves’ economic claims – and are increasingly blaming her for the country’s financial woes.
The More in Common survey found more than half of voters (53 per cent) said Labour lied about its economic plans to win power and ‘always knew they weren’t going to keep to these promises’.
Just 13 per cent say Labour has stuck to its pledges on the economy. Voters are also tired of Labour’s constant attempts to blame the last Conservative government, with only 30 per cent saying they believe the Chancellor has been honest about the scale of the fiscal challenge she inherited.
More than half of voters think Labour is spending too much time blaming the Tories. Some 31 per cent now blame Labour for Britain’s growth crisis, compared with 27 per cent blaming the Conservatives and 18 per cent citing global events.
In its October forecast, the OBR expected GDP to grow by 2 per cent in 2025 and 1.8 per cent in 2026. Those figures already looked optimistic compared to other bodies.
Rachel Reeves has suffered a major setback even before her Spring Statement today with the Treasury watchdog rejecting her claims for savings from benefits
The rate of Consumer Prices Index inflation fell to 2.8%n February from 3% in January
The Bank of England halved its growth forecast for the UK economy in 2025 to 0.75 per cent in February, and earlier this month the OECD cut its 2025 forecast from 1.7 per cent to 1.4 per cent.
Lower-than-expected growth will lead to smaller tax receipts than had previously been budgeted for.
The latest official borrowing figures, for February, were £4.2billion higher than had been forecast by the OBR and over the year the gap is more like £20billion.
Ms Reeves’ self-imposed rule to meet day-to-day spending at the end of the five-year forecast through receipts rather than borrowing was forecast to be met with £9.9billion of headroom to spare in the OBR’s October assessment.