Rachel Reeves Faces Tough Fiscal Choices Ahead of Spring Statement

Economists expect the government to announce a new round of spending cuts at the fiscal policy update next week.

Chancellor of the Exchequer Rachel Reeves during a meeting with regulators at Downing Street in London on March 17, 2025. Jonathan Brady - WPA Pool/Getty Images

The UK’s fiscal outlook has worsened since the October Budget amid higher-than-expected government borrowing, leaving Chancellor Rachel Reeves with few easy options ahead of the Spring Statement, economists have warned.

Reeves will deliver a fiscal update on March 26, following the latest release of public sector borrowing figures this week.

Public sector net borrowing in February reached £10.7 billion, which is £4.2 billion more than the Office for Budget Responsibility (OBR) had forecast.

Over the first 11 months of the 2024–25 financial year, the UK borrowed £132 billion. Based on current trends, the full-year figure could reach £151 billion, which is £23 billion above the OBR’s forecast in October and £63 billion higher than projections made in March 2024, before the general election.

Debt servicing costs continue to rise, with February’s interest payments totalling just under £9 billion.

Analysts warn that with markets now pricing in higher-for-longer interest rates, annual debt costs could be £6 billion higher than previously estimated by 2029–30.

Tightening Expected

Economists expect Reeves to respond with a fiscal tightening worth around £10 billion, or 0.3 percent of GDP, largely to restore the £9.9 billion in headroom she had in October.

“If the Chancellor thought her first Budget last October was a difficult one, she cannot have imagined how much worse the situation would be only four months later,” recent analysis by Capital Economics said.

According to the group, tightening of fiscal policy is likely to come from cuts to welfare and non-defence spending, rather than tax increases, which could shave around 0.1 percent off GDP growth by 2026–27.

Britain has committed to boost defence spending to 2.5 percent of GDP by 2027, aiming to reach 3 percent within the decade.

These spending pressures may result in a looser fiscal stance overall, economists estimate, with potential longer-term implications for growth, interest rates, and government bond yields.

Senior research economist at the Institute of Fiscal Studies Isabel Stockton has argued that the latest borrowing data and revenues highlight “the challenges facing the Chancellor as we head into the week of the Spring Statement.”

The Treasury aims to have debt falling and borrowing below 3 percent of GDP by 2029–30. In October, the government was only just on track to meet this target.

Reeves has committed to meet her fiscal targets, not to raise taxes further and not to return to austerity for public services. These promises, according to Stockton, have “boxed in” Reeves, leaving her with few “easy or risk-free options.”

3 Difficult Choices

According to Capital Economics, Reeves has three main options: raise taxes, cut spending, or amend the fiscal rules.

While relaxed fiscal rules and tax hikes are viewed as unlikely and politically fraught options, economists predict—at around 80 percent likelihood—a new round of spending cuts.

The government has already confirmed that defence spending increases will be funded by reducing foreign aid and reallocating green investment funds. The welfare reform package, announced on Tuesday, is expected to save over £5 billion in 2029 to 2030.

The rest could come from cuts to departmental budgets.

Analysts suggest that Reeves could announce cuts to take effect in 2029–30, placing them beyond the next Spending Review period.

“It would mean they would not need to be allocated to departments in the Spending Review set to be published on June 11. However, investors could perceive cuts so far in the future as lacking credibility.

“So we suspect the Chancellor doesn’t have a choice and that she will be forced to reduce spending from 2026/27 onwards in the hope that if the economic backdrop improves, she can raise it later,” Capital Economics said.

The Spring Statement comes just days before tax hikes announced in October take effect in April.

These include increases to employers’ national insurance contributions, as well as rises in the national living wage and minimum wage, measures that have faced pushback from businesses across multiple industries.

Shadow chancellor Mel Stride has described Reeves’s October Budget as anti-business, claiming it has “killed growth stone dead.”

“With five days to go until Labour’s emergency Budget, Rachel Reeves must think again. Labour’s economic policies are hurting business and Britain,” Stride said on Friday.