A combination of strong political demand for substantially increased defence spending and sluggish growth meant that UK Chancellor Rachel Reeves’ room for manoeuvre in her Spring Statement, announced yesterday, was extremely limited. This is not a budget, but a legally required review of growth forecasts, which, as it was pointing downwards, inevitably meant a need to signal where savings will be made.
Reeves set out a sharp downgrade to UK growth this year, from 2 per cent to 1 per cent, according to forecasts by the Office for Budget Responsibility. This requires a package of £14 billion to repair the public finances involving cuts in welfare spending and also the budgets of government departments.
Labour promised no return to austerity ahead of last year’s election, and has remained determinedly committed to not increasing income tax and keeping to its fiscal rules. So painful real cuts in “unprotected” departments like welfare, justice, the Home Office, transport, and local government were announced. The chancellor said that capital spending on investment projects, seen as key to future growth, would be protected.
More than 3 million people will lose out as a result of significant cuts to welfare. Politically most difficult, not least on Labour’s own backbenches, are the flagged savings in payments to the disabled, ostensibly under the guise of helping people back to work. The sugar-coating is unlikely to work. This is going to be tricky, not just for the worst affected departments, but for Labour’s reputation , coming off the back of cutting winter fuel allowance and cuts to the aid budget.
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Despite the cuts – and the restoration of so-called “headroom” in the budget numbers – the outlook for the UK public finances remains tight. The contrast to the strong budget position in Ireland could hardly be more stark. However, with threats to the Irish economy ahead from US tariffs, events in Britain are a sobering reminder of how difficult it is to correct the public finances once things start to go wrong.
