Mujtaba Rahman is the head of Eurasia Group’s Europe practice. He tweets at @Mij_Europe.
When it comes to the spring statement from Britain’s Chancellor of the Exchequer Rachel Reeves, one thing is certain: It won’t be the one she originally intended.
The U.K.’s economic clouds have darkened considerably since Reeves’ first budget last October. Despite higher inflation and wages boosting government tax receipts, lower than forecast growth and higher than expected government borrowing costs have wiped out the slender £9.9 billion fiscal headroom Reeves gave herself against her fiscal rules — notably, to balance the current budget by 2029–2030.
Furthermore, in an unwanted backdrop to Wednesday’s upcoming statement, the U.K.’s GDP fell by 0.1 percent in January, down from a rise of 0.4 percent in December. And government officials expect the Office for Budget Responsibility to downgrade its forecast of 2 percent growth this year to around 1 percent.
This means financial markets are watching Reeves closely. The wobble that saw government borrowing costs rise in January (before falling back down) was a sign the chancellor still has to prove her mettle. She thus wants to take immediate action on Wednesday, showing her “ironclad” rules are still “nonnegotiable” and she’s determined to meet them.
In her statement, Reeves isn’t expected to raise taxes, but she will likely cut her proposed rise in overall public spending of 1.3 percent per year in real terms from 2026 to 2027 to about 1 percent instead, saving a further £5 billion a year. The details of the squeeze will be included in her government-wide spending review in June.
Significantly, the chancellor had to head off criticism from fellow members of Prime Minister Keir Starmer’s cabinet during its March 11 meeting. In the first direct challenge to Reeves’s authority since last year’s general election, about half of the 22-strong cabinet expressed concern over the impact her fiscal rules will have on departmental budgets, including £5 billion in cuts to welfare spending — her main route to meeting her objectives, along with government efficiency savings.
Those expressing reservations included Deputy Prime Minister Angela Rayner, Home Secretary Yvette Cooper; Energy Security and Net Zero Secretary Ed Miliband, Justice Secretary Shabana Mahmood and Leader of the House of Commons Lucy Powell — all of them powerful figures.
Some ministers also cited Germany’s recent landmark decision to relax its fiscal rules in order to boost defense and infrastructure spending. But Reeves hit back, reminding that Germany’s national debt stands at 62 percent of GDP compared to the U.K.’s at 95 percent. Reeves believes the U.K. is susceptible to interest rate changes, as well as a rise in borrowing costs in line with what happened in Germany, which would add £4 billion to the country’s debt interest payments — already running at £100 billion in the current financial year.
Importantly, Starmer continues to back Reeves, so the cabinet ultimately did restate and reinforce its support for her fiscal rules.
However, the welfare cuts will continue to prove highly controversial with many Labour MPs, who are likely to intensify a wider internal debate over what the party stands for.
Although Starmer has won party praise for his response to developments regarding Ukraine and his handling of U.S. President Donald Trump, a growing number of MPs worry the prime minister is shifting to the right, in an attempt to head off the threat from Nigel Farage’s Reform UK party. Additionally, some party loyalists worry Starmer’s Labour is more right wing than former Prime Minister Tony Blair’s.
There will, therefore, continue to be calls from within the party to introduce a wealth tax, or to revisit Labour’s manifesto pledges of not raising income tax, national insurance or VAT, on the grounds that the facts have changed in this new geopolitical order.
But Reeves is unlikely to do so. Further tax rises — on top of the £40 billion in last October’s budget — would be politically painful and could harm economic growth. So, the chancellor hopes to square the circle by filling the gap with welfare cuts and government efficiency savings instead.
Although many of her pro-growth measures will only come to fruition in the long term, Reeves hopes that, with inflation and interest rates under control, the markets will acknowledge she’s created stability and that investment will pick up in the short term.
Ultimately, though, it will all hinge on getting higher growth. This is a gamble — but for now, Reeves will continue to argue there’s no other way than to take the bet she’s making.
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