Reeves’ repair job avoids tax rises — for now

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The chancellor called it a Spring Statement. The Conservatives called it an Emergency Budget. In practice, Rachel Reeves’ 33-minute statement to MPs had all the hallmarks of a holding operation.

The central feature of the chancellor’s statement was an explanation of how she would fill a £14bn fiscal hole that has opened up since her Budget in October, the result of rising borrowing costs and stagnant growth.

It was a repair job, carried out through a mixture of welfare cuts, reductions in planned day-to-day spending, a crackdown on tax evasion and a blitz on civil service efficiency, all announced with minimum fuss.

But the inescapable sense from Reeves’ speech was that the main purpose of the Spring Statement was to keep the fiscal show on the road. The next six months look likely to present a much bigger economic and political test.

“The world is changing — we can see it and we can feel it,” Reeves told MPs. She did not mention Donald Trump by name, but the US president cast a shadow over the chancellor’s speech.

Whether it was her promise to fund a British rearmament programme or her warning that global trade patterns could become “more unstable”, the menace to Britain’s economy from the Trump presidency is clear.

The Office for Budget Responsibility highlighted the fact that Reeves’ £9.9bn shock absorber fund against her key fiscal rule — to balance current spending with tax receipts by 2029-30 — was extremely fragile.

It said this was only a third of the average figure — £31.3bn — set aside by previous chancellors since 2010. If things go wrong, Reeves will have some tough choice in her autumn Budget — including potential further tax rises.

Oliver Dowden, former Tory deputy prime minister, told the Financial Times: “She has exhausted the Labour party’s appetite for spending cuts. When she comes back in the autumn with tax rises, she will be in big trouble.”

Many Labour MPs are already extremely nervous about the £3.4bn of net welfare savings being lined up by Reeves; a government impact assessment of the policy has filled some with dread.

It found that a quarter of a million people, including 50,000 children, will be pushed into relative poverty as a result of the welfare reforms.

“The mood is grim,” said one veteran Labour MP. “You won’t see a big revolt or anything but people are being ground down.”

Party whips may not be so sanguine, given that the welfare package will be subject to a House of Commons vote.

Cuts to day-to-day departmental spending are already being resisted by some cabinet ministers and are being labelled as “a return to austerity” by a Conservative party long associated with the phrase. Further big cuts will carry a political price.

Reeves hopes that the worst can be avoided and that Britain can seal a speedy trade deal with Trump to avoid the most punitive US tariffs. But Britain will be hit like all other economies by a global trade war, something the OBR warned may wipe out the headroom she plans to restore through Wednesday’s measures.

Tory shadow chancellor Mel Stride said Reeves would have been sensible to have built in more headroom to her latest fiscal plans, given the squeeze she has faced since her Budget last October.

While she unveiled cuts on Wednesday to re-establish the same level of headroom in her updated plans, he said: “She had that amount precisely before and blew it — and more.”

In an oblique warning to the chancellor, Stride stressed that if another fiscal repair job is due by the autumn, the Tories would be “loath to be looking at tax increases” if they were in charge of the public finances.

Any economic deterioration could force Reeves to come back to the question of higher taxes, only a year after she announced £40bn of tax increases, £25bn of which fell on employers through higher national insurance payments.

There were other economic warning signs. The OBR suggested that mortgage interest rates will be 0.2 percentage points higher over the forecast period than it expected in October.

The forecaster also presumed that 76 per cent of the cost of the NICs rise will be passed on to workers “via lower real wages”. It said most surveys of business leaders point to a substantial reduction in nominal wages.

There were some bright spots in Reeves’ statement that will have given Labour MPs cheer. The OBR reckons that planning reforms will boost growth and it has raised its growth forecasts for later in the parliament to about 1.75 per cent, even as it slashed this year’s prediction to just 1 per cent.

Reeves claims that higher defence spending, rising to 2.5 per cent of GDP in 2027, will underpin a defence and industrial renaissance in Britain. The OBR also welcomed the government’s plans to increase housebuilding.

The summer will see Reeves oversee a new industrial strategy and conclude a “zero-based review” of all public spending. “This is a government with the courage to step up,” she insisted.

But the chancellor’s judgment has been questioned in the run-up to the Spring Statement. Government officials speak of the “shambles” in which ministers announced £5bn of net welfare savings last week, only for the OBR to say it was only willing to “score” savings of £3.4bn.

Then there was Reeves’ decision to accept “freebie” tickets for a Sabrina Carpenter concert at a time when she was cutting benefits for the sick and disabled. The chancellor said it was for security reasons but admitted on Wednesday that she could see some people would think it “odd”.

She will need to be more sure-footed in the period ahead. Although the Spring Statement was a tough moment for Reeves, there was a sense among MPs drifting out of the Commons chamber that the next six months will be even more testing and will define her chancellorship.