Rachel Reeves is preparing to implement billions of pounds in cuts to welfare benefits and other public expenditures ahead of the upcoming Spring Statement.
The chancellor is set to present significant revisions to the government’s spending plans on Wednesday, March 5 following concerns that her fiscal flexibility since October’s Budget has been drastically reduced.
Treasury insiders have acknowledged that “the world has changed” since Reeves delivered Labour’s first Budget in power when she had a £9.9 billion buffer in her fiscal strategy. Since then, economic stagnation, rising inflation, and increased borrowing costs have complicated the financial landscape.
Additionally, potential trade tensions stemming from Donald Trump’s tariff policies could further strain the British economy, even if the UK manages to secure an exemption. Reeves has warned of the risks, while Prime Minister Keir Starmer has confirmed that discussions with the Trump administration are underway to negotiate a trade agreement that would shield Britain from a tariff dispute.
A Treasury source emphasized that, regardless of external pressures, “this is something we would need to do” given the rapid growth in welfare expenditures. Officials are expected to introduce “major measures” to the Office for Budget Responsibility (OBR) on Wednesday, with deep spending cuts aimed at ensuring compliance with Reeves’ self-imposed fiscal guidelines.
These rules dictate that borrowing cannot be used to finance daily government spending and that national debt must decline as a percentage of GDP.
Insiders have indicated that the planned welfare cuts will be “politically painful”, particularly as they focus on the sharp rise in health-related benefits. A speech detailing these measures is expected from Work and Pensions Secretary Liz Kendall.
Hinting at the government’s intent to rein in the benefits bill — particularly as costs have surged since the pandemic — Justice Secretary Shabana Mahmood underscored the importance of ensuring those who can work are encouraged to do so. “There is a moral case for making sure that people who can work are able to work,” Mahmood said.
“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.”
Justice Secretary Shabana Mahmood
However, such deep welfare cuts could present a significant political challenge for Starmer, who is already under pressure from Labour backbenchers over reductions in international aid and perceived inaction on child poverty.
Beyond welfare spending, ministers are also expected to introduce a major initiative to cut costs within the civil service. This includes a reduction in workforce numbers, continuing a policy pursued by multiple governments in recent years.
Fiscal Targets Under Scrutiny
Economists at the Institute for Fiscal Studies (IFS) have warned that Reeves has “engineered a trap for herself” by committing to “inflexible, pass–fail fiscal targets by the slimmest of margins.”
Matthew Oulton, a research economist at the IFS, highlighted the risks of economic deterioration impacting Reeves’ ability to meet her fiscal commitments.
“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.”
Matthew Oulton
Meanwhile, the New Economics Foundation has cautioned that welfare cuts could result in 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.”
With the Spring Statement approaching, Reeves faces the challenge of balancing fiscal discipline with political pressures and economic realities. How she navigates this test will shape the government’s economic direction.
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