Reeves statement fails to fix Britain's creaking budget
Experts warn that the Chancellor's latest spending plans could still be blown off course by economic and geopolitical headwinds.
The new spending plans announced by the Chancellor of the Exchequer in her Spring Statement could be disrupted by economic and geopolitical headwinds, experts have warned. Earlier today, Rachel Reeves unveiled new plans for public spending in the House of Commons after the Office for Budget Responsibility (OBR) forecast that her previous proposals, outlined by the budget in October, would have increased government debt and violated the Chancellor’s own fiscal rules.
In her statement today, the Chancellor claimed to have restored the fiscal headroom in the budget – the amount by which the government can increase spending or cut taxes without breaking its own spending rules. This has brought back a buffer of £9.9bn in the United Kingdom’s spending plans.
But critics have expressed concerns about the precarious nature of the headroom that Reeves has created. Remember that it was only in October, during the autumn budget, that the Chancellor changed the government’s fiscal rules – shifting the measurement of government debt from public sector net debt to public sector net financial liabilities – in a bid to give herself greater room for increased public spending.
Between October and March, this headroom was wiped out by disappointing tax revenues and rising government borrowing costs. There is a very real possibility that history will repeat itself – and soon.
There are several contingencies that could combine to scupper Reeves’ best-laid plans. The biggest threat will be any new tariffs implemented by the Trump administration. The OBR has warned that if the United States were to introduce a 20% global tariff on all goods, it would cut Britain’s GDP by 1% and eliminate the £9.9bn budget headroom. It would also take 0.6% off the OBR’s forecast of 1.9% GDP growth in 2026.
Then there are Labour’s own employment rights reforms. The OBR’s latest economic and fiscal outlook report makes clear that the watchdog has not yet fully factored the government’s Plan to Make Work Pay into its forecasts.
Even after today’s Spring Statement, the Chancellor’s room for error is wafer thin. Indeed, the fragility of her fiscal headroom was pointed out earlier today by Paul Johnson, the director of the Institute for Fiscal Studies.
Johnson said: “This was just about the smallest fiscal event Rachel Reeves could have managed in the context of her fiscal rules and the minor forecast downgrade presented to her by the OBR. The fact that a fairly run-of-the-mill change to the forecast forced her to cut her spending plans reflects the tiny amount of headroom she chose to leave against her targets last October. In today’s spring statement, departmental spending plans and, it seems, welfare policy have been fine-tuned to return to precisely the same amount of headroom that she had previously.”
The danger for Reeves lies in the fact that her tinkering has merely papered over Britain’s budget problems without fundamentally redressing them. Her current fiscal plans could easily be blown off course by a sudden rise in borrowing costs, a decline in the tax take, stubbornly high inflation, a spike in energy prices, American tariffs, and unexpected geopolitical shocks – or a combination of all these things. The Chancellor’s ironclad fiscal rules are in danger of being broken again.
If this happens, she will have to go back to the drawing board in the October budget. Or worse, in extreme circumstances she may even be forced to return to the House with an emergency budget before the autumn.
Britain’s fiscal problems will not be any easier to fix further down the line either. Taxation is already set to rise to its highest level in the postwar period, resting at nearly 38% of GDP. To combat future fiscal headwinds, Labour will be compelled either to continue hiking a tax burden that has already reached an historic peak, or to press ahead with deeper, and politically torturous, cuts to welfare.
The measures proposed for the latter have already proven highly unpopular with many Labour cabinet ministers and backbenchers. These discontents argue that Reeves’ determination to meet her fiscal rules through welfare cuts is punishing the poorest in society. An impact assessment released by the Department for Work and Pensions, predicting that the Chancellor’s welfare savings will leave 3.2 million families worse off by 2030, will only add grist to their mill.
Nonetheless, Britain’s unsustainably large debt and tax burdens cannot go on indefinitely. At some point, something riskier and more radical will have to be done to unburden the private sector and rebalance the economy. In the words of the great American economist, Herbert Stein: “If something cannot go on forever, it will stop.” A course correction can be delayed, but not indefinitely.
Throughout all this, it is clear that Reeves’ political future hangs in the balance. There are already figures in the Labour party who question whether the Chancellor is up to the job. If today’s statement fails to tackle Britain’s fiscal problems over the long term, the Prime Minister may start listening to them. The Chancellor – like the country – is not out of the woods yet.
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