REVEALED: Chancellor plans £15bn spending squeeze

Chancellor Reeves Expected to Announce Significant Spending Cuts

Chancellor Rachel Reeves is anticipated to unveil a substantial spending reduction of up to £15 billion as part of efforts to stabilize public finances. Further tax increases may also be necessary if the economy’s sluggish performance persists, according to financial analysts.

Justification for Fiscal Measures

In Wednesday’s Spring Statement, the Chancellor is expected to cite global economic shifts as the rationale for implementing significant reductions in Whitehall budgets and bureaucratic processes. This move is likely to represent the most aggressive austerity measures targeting public services since the period under former Chancellor George Osborne.

OBR’s Cautious Outlook

However, the Office for Budget Responsibility (OBR), the independent fiscal watchdog, is predicted to adopt a conservative stance regarding the feasibility of achieving certain savings. These include projected efficiencies from government-wide artificial intelligence implementation. The OBR is scheduled to release its assessment of the nation’s financial health on the same day as the Spring Statement.

Growth Forecast Downgrade

Adding to the Chancellor’s challenges, the OBR is also expected to significantly lower its economic growth forecast for 2025, potentially halving it to approximately one percent. This downward revision will intensify pressure on the Chancellor to consider additional tax measures later in the year to comply with established fiscal rules.

Fiscal Rule Constraints

These rules mandate that current government expenditures must be financed through taxation rather than borrowing. They also stipulate a reduction in national debt as a proportion of national income by the end of the current Parliament.

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Budget Headroom Erosion

In October, the OBR indicated that the Chancellor was projected to meet her primary fiscal rule with a minimal £10 billion buffer. However, this margin has since been eliminated. The £25 billion Budget increase in employers’ National Insurance contributions has negatively impacted business sentiment, stifled economic expansion, and driven government borrowing costs upwards.

Seeking Spending Reductions

The Chancellor has indicated that no major tax increases will be announced this week. Consequently, economists suggest that spending cuts of up to £15 billion will be necessary to re-establish a financial reserve that is considered credible by financial markets.

Global Economic Headwinds

Economic growth prospects have diminished following signals of potential global trade tensions. These include US President Donald Trump’s threats to impose significant tariffs on various countries, including Canada, Mexico, China, and nations within the European Union.

Defence and Aid Budget Adjustments

Plans to bolster defence spending to decrease the UK’s reliance on military support from the United States are expected to be funded through reductions in the foreign aid budget.

Benefit Savings and Departmental Cuts

The government has already declared £5 billion in anticipated savings from benefit payments.

Further reductions, potentially ranging from £5 billion to £10 billion, may be sought from the budgets of ‘unprotected’ government departments. These include the Home Office, the justice system (courts and prisons), environmental agencies, and local government authorities.

However, local governments are responsible for essential social care services for the elderly, which are facing considerable demand.

Efficiency and Reform Measures

Healthcare reforms, including the recent decision to disband the NHS England quango, could yield an additional billion in savings. Further efficiencies may be achieved through increased digitization of public services and civil service reforms, potentially generating £3 billion and £2 billion respectively.

OBR’s Forecast Skepticism

Nevertheless, the OBR is unlikely to incorporate the entirety of these projected savings into its economic forecasts. This is partly because the Government’s comprehensive Spending Review is not scheduled until the summer, according to Sanjay Raja, UK economist at Deutsche Bank.

Therefore, the OBR is likely to conservatively project savings of less than £15 billion, he indicated.

Long-Term Growth Potential Assessment

The watchdog is unlikely to revise downwards its projections for the economy’s long-term growth potential.

The OBR has faced criticism for potentially holding an overly optimistic perspective on productivity, as measured by output per hour worked.

Bloomberg Economics research suggests that if the OBR were to assume the continuation of the past 15 years of slow productivity growth for another five years, the Chancellor could be confronted with a £45 billion ‘fiscal deficit’.

Economists’ Differing Views

Some economists hold a somewhat more optimistic outlook. Analysts at the investment bank Investec stated, ‘Our expectation is that the OBR will largely maintain its current stance on growth potential, at least for now.’

This would moderate the scale of spending cuts required to meet fiscal targets. Overall, Investec economists believe Chancellor Reeves will be compelled to reduce her Budget spending plans by at least £10 billion. However, they doubt that savings of up to £20 billion will be necessary to comply with fiscal rules and establish a sufficient safety margin.

Political and Market Considerations

Implementing substantial reductions in public spending will present political challenges for the government.

However, Chancellor Reeves’ primary concern will be the financial markets’ reaction to her fiscal update.

The Treasury declined to comment on ‘speculation’ surrounding OBR forecasts.

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