Rachel Reeves will give her spring statement on Wednesday, with a warning that spending cuts are required because “the world has changed” amid rising government borrowing costs.
After announcing deep cuts to welfare, provoking a fierce backlash within her party, the chancellor will present updated forecasts from the Office for Budget Responsibility (OBR) on the outlook for the economy and government finances.
Here are the economic considerations that will underpin her Commons’ address, illustrated in five key charts:
Weaker economic growth this year
Britain’s economy is close to stagnation after a sharp drop in business and consumer confidence in recent months.
Despite sweeping to power last July with a promise to kickstart growth, official figures show gross domestic product (GDP) has barely budged since; with zero growth in the third quarter of 2024 and a negligible 0.1% in the final three months. Things have not improved much so far this year: the economy shrank by 0.1% in January.
Economists point to rising global uncertainty after Donald Trump’s return to the White House, as well as Labour’s gloomy rhetoric and tax rises. High interest rates and stubborn inflation also present headwinds.
Against this backdrop, the OBR is expected to slash its growth forecasts for 2025 by as much as half, from a previous estimate of 2% made alongside the October budget. That would compare to a similar downgrade by the Bank of England, which halved its forecast from 1.5% to 0.75%.
Rising debt interest costs
UK government borrowing costs have risen sharply since Reeves’s October budget; partly driven by domestic factors, but also global worries over Trump’s trade wars hitting growth and stoking inflation.
The yield – in effect, the interest rate – on 10-year UK government bonds has reached almost 4.8%, up from about 4% a year ago.
The OBR is expected to raise its inflation forecast, as households come under renewed pressure on living costs after a cold winter in Europe pushed up wholesale energy prices. Back in October, the OBR had forecast inflation to average 2.6% over 2025 but, last month, the Bank warned it could hit a fresh peak of 3.7% by the autumn.
Stubbornly higher inflation is expected to limit the Bank’s capacity to cut interest rates – reflected in the rise in bond yields. After three reductions in the past year, City investors expect just two more quarter-point rate cuts this year, to 4%.
Fiscal rules at risk
The UK’s rising debt interest costs are expected to have wiped out the £9.9bn in headroom that Reeves kept in reserve in October against her main fiscal rule – requiring day-to-day spending to be matched by revenues within five years’ time.
With a debt stock of more than £2.6tn, close to 90% of GDP, the rise in borrowing costs pushes up the bill for servicing the nation’s outstanding debts.
Back in October, the OBR had expected debt interest spending of about £105bn this year, rising to about £122bn by 2029-30. These figures will be revised up.
Reeves has said her financial targets are “non-negotiable”.
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Cutting benefits
The government last week announced £5bn in savings from cutting sickness and disability benefits, despite deep opposition from Labour MPs, charities and poverty campaigners, who warned it could hit the most vulnerable.
After months of speculation, the changes will help the chancellor to rebuild her headroom against her fiscal targets.
It comes as spending on health-related benefits for working-age adults has risen sharply in recent years, and since the Covid pandemic in particular. According to the Resolution Foundation, real-terms spending on disability and incapacity benefits was on track to reach £92bn a year by the end of the decade.
Ministers have also said there is a “moral case” and an economic case behind the reforms, arguing the current system locks people out of work. Alongside limiting the growth in welfare spending, the government plans to spend £1bn a year extra on helping people back into jobs.
No return to austerity?
Labour had pledged before the general election there would be “no return to austerity”. It is a charge Reeves will respond to by pointing to £40bn a year of tax increases to help fund £70bn of spending increases in the autumn budget. The chancellor will also increase capital spending by more than £100bn over the next five years.
However, faced with a shortfall against her financial targets, Reeves could cut the generosity of overall spending for the later years of the current parliament, before it is allocated to individual departments in the June spending review.
In October, the chancellor had outlined plans for departmental spending to increase by 1.3% a year on average in real terms after 2025-26. Reducing this to about 0.9% a year would save about £10bn by the end of the decade, according to the Institute for Fiscal Studies.
After taking account of ringfenced budgets – including for the NHS, schools and defence – this would mean a smaller pot left for unprotected departments, such as local government, justice, and culture, media and sport. These areas have been subjected to the deepest cuts since 2010.
