Rachel Reeves is planning billions of pounds of cuts to benefits and other public spending ahead of this month’s Spring Statement, it has emerged.
The chancellor will present major changes to the government’s spending watchdog on Wednesday amid fears her fiscal wiggle room after October’s Budget has been wiped out.
Treasury sources said “the world has changed” since Ms Reeves delivered Labour’s first Budget in power, when she had a £9.9 billion buffer in her spending plans.
Since then, economic growth has flatlined, while inflation and borrowing costs in the UK have risen. Donald Trump’s looming tariff wars also threaten to hit the British economy, even if Britain is exempt, Ms Reeves warned on Tuesday. And a Treasury source told The Independent that, given the rate at which the welfare bill is spiralling, “this is something we would need to do” anyway.
Speaking to the BBC, Treasury sources outlined plans for “major measures” to be presented to the Office for Budget Responsibility (OBR) on Wednesday, with deep spending cuts expected to meet the chancellor’s self-imposed fiscal rules.
The rules state that borrowing can not be used to fund day to day spending, and that debt must be falling as a percentage of Britain’s GDP.
Insiders said the welfare cuts would be “politically painful” and would target the huge rise in health-related benefit payments, with a speech expected on the measures from work and pensions secretary Liz Kendall.
An insider told the broadcaster: “Clearly the world has changed a lot since the autumn Budget. People are watching that change happen before their eyes.
“The Office for Budget Responsibility will reflect that changing world in its forecasts later this month and a changing world will be a core feature of the chancellor’s response later this month.”
And, hinting at the government’s focus on bringing down the benefits bill, which has spiralled since the pandemic, justice secretary Shabana Mahmood on Wednesday said “there is a moral case for making sure that people who can work are able to work”.
“There is a practical point here as well, because our current situation is unsustainable, so on both of those measures I think the welfare secretary is looking at the right area of policy,” she told BBC Radio 4’s Today programme.
She added: “We’ve seen a huge rise in that welfare budget. We know that there are millions of people who are out of work in our country who want to be in work.
“It is absolutely morally the right thing to do to support people to make sure either they don’t leave the labor market, or if they have, they’re supported to get back into it.”
But any deep cuts to the welfare budget would be politically painful for Sir Keir Starmer, who is already facing pressure from Labour backbenchers over cuts to international aid spending and a lack of radical action to tackle child poverty.
As well as targeting the benefits bill, ministers are expected to outline a major civil service cost-cutting drive in the run up to the Spring Statement, with a major reduction in headcount as has been pursued by successive governments in recent years.
Economists at the Institute for Fiscal Studies on Wednesday warned Ms Reeves has “engineered a trap for herself” by aiming to meet “inflexible, pass–fail fiscal targets by the slimmest of margins”.
Research economist Matthew Oulton said: “It was always possible that economic conditions would deteriorate, put her on track to miss those rules, and push her into making tax and spending changes at what isn’t supposed to be a fiscal event later this month. This scenario is far from guaranteed and she could still get lucky. But if not, she will have to choose between her fiscal rules and her commitment to holding only one fiscal event per year.”
Meanwhile the New Economics Foundation warned welfare cuts will mean a “bigger squeeze on living standards for the poorest, undermining the government’s growth mission and flying in the face of their child poverty strategy”.
The think tank’s deputy chief executive Hannah Peaker said: “Justifying this decision by saying that Reeves’ “financial buffer” has been wiped out is folly: the fiscal rules which define the government’s spending headroom are entirely self-imposed and can be changed at the flick of the chancellor’s pen.
“This government has plenty of ways to raise the money it needs to provide vital services, and yet they seem unwilling to confront those trade-offs – instead crossing fingers for growth and reflexing to austerity.”
And the Public and Commercial Services union warned cutting civil service jobs will damage public services while “cutting disability benefits will condemn people to poverty”.
“We’d have hoped we wouldn’t have to explain the damage wreaked by austerity to a Labour government,” general secretary Fran Heathcote said.
The SNP sought to pile pressure on Labour over the planned cuts, claiming they would be “deeply damaging for Scotland” and a breach of an election promise. “The news that the Labour Party will now slash billions more from our public services is a total betrayal of what voters were told at the election – and it shows that neither Keir Starmer or Anas Sarwar can be trusted to keep their promises,” SNP Westminster leader Stephen Flynn said.