Chancellor Rachel Reeves is encountering criticism from within the Labour Party regarding welfare cuts, as she has had to make last-minute savings to address budgetary concerns ahead of a challenging Spring Statement on the state of the economy scheduled for Wednesday.
Government officials revealed that ministers were compelled to identify an additional £500 million in cuts following a disagreement with the Office for Budget Responsibility (OBR) over projected savings from welfare changes announced the previous week.
Labour MPs had already expressed apprehension about the welfare cuts—claimed by Work and Pensions Secretary Liz Kendall to save £5 billion per year—with growing public and private disapproval of the plans. However, the OBR challenged the £5 billion figure, forecasting savings of only £3.4 billion even after the extra £500 million cuts, according to individuals familiar with the forecasts. As a result, Reeves would need to find other areas to make further cuts.
A source involved in the drafting of the statement described the situation as chaotic. New OBR economic forecasts, to be released around 12:30 PM on Wednesday, are expected to revise the 2025 growth forecast from 2% to about 1%.
Reeves is grappling with a budget deficit of approximately £15 billion compared to her plans made in the October Budget, which she plans to address mainly through reductions in public spending. Alongside the OBR forecasts, she will release the government’s impact assessment of welfare changes, highlighting the effects on society’s most vulnerable, specifically regarding the freezing of universal credit incapacity benefits for new claimants until 2030 instead of increasing them with inflation.
The OBR’s decision not to validate the £5 billion net welfare savings announced by Kendall has caused disarray shortly before the statement. Government insiders indicated that Kendall faced pressure from 10 Downing Street and the Treasury to expedite her announcement following leaks to ITV News on March 8. When presenting her statement to MPs on March 18, Kendall acknowledged that the net savings required OBR approval. However, the fiscal forecaster predicted net savings of only £2.9 billion, prompting Kendall to seek emergency additional cuts.
An individual involved in finalizing the Spring Statement described the situation as poorly managed, with many Labour MPs feeling unsettled by the developments. Ruth Curtice, head of the Resolution Foundation, commented that while costings often fluctuate, the announcement’s timing—before OBR’s valuation—was unusual.
Reeves is set to deliver a 25-minute address in which she will argue that the changing global economic and security environment, including influences such as Donald Trump, has necessitated a shift in economic strategy. She intends to emphasize upcoming efforts to secure an economic deal with the US and enhance trade relations with the EU amidst looming punitive Trump tariffs.
Reeves is also set to announce an increase in the UK’s defense spending by £2.2 billion next year, with the intention of supporting British employment and skills. While emphasizing the security provisions for the UK, both economically and militarily, her speech will focus on dismal growth data, a substantial fiscal deficit, and the potential for worsening conditions.
The additional military funding will come from cuts to the overseas aid budget and the Treasury reserve, raising UK defense spending to 2.36% of GDP for the 2025-26 financial year, with plans to reach 2.5% by 2027 through further reductions in foreign aid.
Defense Secretary John Healey remarked on the difficulties facing the country. The address is framed against the backdrop of Donald Trump’s presidency, which has influenced the need for increased defense spending.
Reeves acknowledged the possibility that a global trade war initiated by Trump could exacerbate economic difficulties, while government officials rejected claims of ushering in a new era of austerity.
Darren Jones, Chief Secretary to the Treasury, on Tuesday, briefed 75 ministers on the Spring Statement plan, which includes at least £5 billion in cuts from Whitehall spending later in the parliamentary term alongside welfare savings. Jones emphasized that this approach does not equate to austerity as real public service spending is expected to rise annually, building upon Reeves’ significant allocation of funds to the NHS and other areas in her October Budget.
Paul Johnson, head of the Institute for Fiscal Studies, described austerity fears as exaggerated in light of the government’s October announcements and in comparison with previous government plans. However, sluggish economic growth and potential trade wars could force the Chancellor to consider further cuts or tax increases for the autumn Budget.
Reeves is facing challenges regarding public perception of her management of the economy. A YouGov survey indicated that only 16% of voters believe the government is handling the economy well, with just 11% holding a positive view of Reeves’ performance.