Pressure is mounting on Chancellor Rachel Reeves as she prepares to deliver her first Spring Statement next week.
Reeves has commissioned the Labour government’s Spring Forecast from the Office for Budget Responsibility (OBR), the UK’s fiscal watchdog. The forecast on the nation’s economic health will be published on 26 March, with Reeves delivering a statement in parliament shortly afterwards.
As households and businesses continue to digest the implications of last year’s Autumn Budget, which unveiled £40 billion in tax hikes and £70 billion in spending policies, you are possibly hoping that nothing further will be announced.
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The Treasury has previously said Reeves is “committed to one major fiscal event a year to give families and businesses stability and certainty on upcoming tax and spending changes”, which would suggest this is not intended to be a big event.
However, a challenging economic backdrop could force Reeves's hand.
High borrowing costs and low economic growth have already wiped out the government’s £9.9 billion “fiscal headroom”, according to reports from Bloomberg last month.
The latest Office for National Statistics data shows the UK economy went into reverse in January, with GDP down 0.1%. Meanwhile, inflation has been rising and the Bank of England held interest rates steady in March amid economic uncertainty.
In a recent survey from wealth management firm Quilter, 47% of investors said they expect Reeves to cut spending rather than raise taxes at the upcoming Spring Forecast. Around a third (35%) believe spending cuts and tax rises will be combined, while 6% think tax increases alone will be used to balance the books.
When MoneyWeek asked the Treasury to comment on whether any policies would be announced on 26 March, they neither confirmed nor denied, simply stating: “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”.
Will Rachel Reeves announce spending cuts?
Spending cuts seem to be the most likely solution.
The government has already outlined a series of welfare cuts this week to save £5 billion by 2030. Alongside welfare cuts, health secretary Wes Streeting has outlined an efficiency drive within the civil service with the goal of bringing about significant savings. This has included scrapping NHS England.
The anticipated cuts come after prime minister Keir Starmer announced the defence budget would increase by £13.4 billion to 2.6% of GDP by 2027 following increased fears that the US would make a deal with Russia to end the war in Ukraine. Starmer has said that much of the funding would come from cuts to the international aid budget.
In the longer term, cuts could be on the horizon for other parts of planned government expenditure. For instance, GB Energy could face billions of pounds less in funding this summer if the government tries to cut costs in its spending review in June, as recent reports suggest.
The state-owned renewable energy investment body was promised in Labour’s 2024 manifesto and is in the early stages of being established. Energy secretary and former Labour leader Ed Miliband is leading the project. But now, reports from the Financial Times say the Treasury is eyeing up potential cuts to the project, which was planned to have a budget of £8.3 billion over the course of the current parliament.
One option to save cash on the project comes from axing the £3.3 billion sum ringfenced to fund low-interest loans for renewable energy projects like putting solar panels on roofs, and shared-ownership wind turbines. This move alone would almost halve GB Energy’s budget.
Meanwhile, many other initiatives and departments could face budget cuts in the June spending review as the government makes up for a shortfall in its fiscal headroom. The review is expected to be so extensive that one government official told the FT that the following blanket response could be applied to every single spending commitment: “[His Majesty’s Treasury] refuses to confirm X”.
When approached for comment, a government spokesperson told MoneyWeek: “We are fully committed to the £8.3 billion for GB Energy, which is at the heart of our mission to make Britain a clean energy superpower and to ensure our homes are cheaper and cleaner to run.”
Spring Forecast: Will Reeves be forced to raise taxes further?
Analysts are not expecting any tax rises to be announced next week.
“The Spring Statement is not scheduled to be a tax-and-spend event, so we aren’t anticipating the fiscal announcements you’d normally expect at a Budget – although it is impossible to be certain this will remain the case,” said Tom Selby, director of public policy at investment platform AJ Bell.
“That doesn’t mean it won’t be consequential, however, with the OBR forecasts setting the scene for the country’s finances and potentially paving the way for more difficult decisions later in the year,” he added.
Selby told MoneyWeek that the Treasury could face some big questions if the OBR forecast reveals that Reeves’s “fiscal headroom” has been wiped out, as anticipated. It will need to decide whether tax rises or spending cuts will be used to balance the books. Deciding which areas to target will be challenging.
“Given the severe criticism the government has faced following the hike in employer National Insurance and the subsequent downgrade in growth forecasts, it seems unlikely further substantial hits to businesses will be on the table,” he said.
A recent survey of 52 leading retailers, conducted by the British Retail Consortium, revealed that 56% of respondents plan to reduce employees’ hours or overtime in response to April's National Insurance changes.
Around half are planning to reduce their headcount, and around 67% are planning to hike their prices to help offset the costs associated with a higher wage bill. All of this could prove damaging to the government’s growth mission.
Some commentators argue that the government has backed itself into a corner by promising not to hike the three main taxes this parliament – income tax, employees’ National Insurance contributions, and VAT. Collectively, these accounted for more than 60% of total tax receipts in 2023/24.
With this in mind, Selby suggests that scaling back public spending could be the only remaining option. This too will be “extremely challenging both practically and politically,” he says, “particularly as the chancellor has committed to not returning to the austerity policies adopted by George Osborne in the wake of the financial crash”.
Treasury says fiscal rules are “non-negotiable”
At the end of January, the House of Commons voted to bring Reeves’s new fiscal rules into law.
The first is known as the “stability rule”. This ensures that day-to-day spending is matched by tax revenues, so the government is only borrowing to invest. The second is known as the “investment rule”. This requires the government to reduce net financial debt as a share of the economy.
The Treasury reiterated to MoneyWeek that these rules are “non-negotiable”. Against this backdrop, it sounds as though Reeves could be in a tough spot. However, the economists at European bank ING recently argued that meeting the fiscal rules is not quite as hard as it sounds.
They said: “Remember that the fiscal rules are based not on actual budget deficits/surpluses right now, but where they’re projected to be in five years’ time. That allows for plenty of creative accounting about what the future holds.
“In the aftermath of the 2022 ‘mini-Budget’ crisis, then-chancellor Jeremy Hunt won round investors and the OBR by promising big real-term spending cuts to various government departments in three to five years’ time. Three years on in 2025, the reality is quite the opposite. Real-term spending is set to increase – by a lot.”
ING believes the Treasury is likely to do something similar this time around, if the OBR reveals that Reeves’s fiscal headroom has been used up, probably focusing on future spending cuts rather than future tax rises.
“The lesson from 2022 is not to be fooled into thinking that will necessarily imply dramatically lower spending in the next financial year,” the bank’s economists added. “More likely, the heavy lifting will come by paring back spending plans in future years, which ultimately may never materialise.”
Jamie Morrison, head of the private client team at HW Fisher, added: “With Labour committed to keeping their main tax announcements [to once a year], we’re not expecting any major tax changes in the upcoming Spring Statement. As the UK’s tax burden is already at a historic high, it is more likely that spending cuts and reform to public finances will take centre stage.”
Alternatively, the chancellor could look to other seemingly invisible options. “On tax, there has been speculation that Reeves might extend the Tories' freeze on tax thresholds beyond 2028, despite her previous pledge to end the freeze,” said Ian Cook, chartered financial planner at Quilter. “This 'taxing by stealth' has been a common move by policymakers when faced with difficult choices,” he added.
The move would almost certainly prove unpopular, though, and be seen as a direct U-turn on what was announced in the Autumn Budget. At a push, it could even be seen as a broken manifesto promise given taxpayers would effectively find themselves paying more income tax as a result.
