The Treasury has earmarked several billion pounds in draft spending cuts to welfare and other government departments amid expectations the chancellor’s room for manoeuvre has all but been wiped out.
The department will put the proposed cuts to the Office of Budget Responsibility (OBR), the official forecaster, on Wednesday ahead of the Spring Statement later this month.
Sources said it was evident that “the world has changed” since the Budget last October, when the OBR indicated that Chancellor Rachel Reeves had £9.9bn in headroom against her self-imposed borrowing targets.
The OBR’s forecast, which will be published alongside the Spring Statement, is likely to see that disappear because of global economic headwinds and changes to the UK’s long-term economic performance.
The Treasury will on Wednesday inform the OBR of its “major measures” -essentially changes to tax and spend in order to put the public finances back on track to meet the chancellor’s self-imposed rules.
Internally, the department is blaming global economic policy and geopolitical uncertainty for hiking up government borrowing costs.
The euro area economy also stagnated while lower UK productivity numbers have affected the forecast.
One government insider, said: “Clearly the world has changed a lot since the autumn Budget. People are watching that change happen before their eyes.
“The Office for Budget Responsbility will reflect that changing world in its forecasts later this month and a changing world will be a core feature of the chancellor’s response later this month.”
This week, US President Donald Trump imposed tariffs on its three biggest trading partners: Canada, Mexico and China. Trump indicated that the UK could avoid border taxes when he met with Prime Minister Sir Keir Starmer last week.
But Reeves told the BBC on Tuesday that even if the UK is not hit by tariffs, a global trade war would lower growth and raise inflation.
The corrective budget measures will reflect existing policy aims, but will also help plug the gap that has emerged in recent months.
Insiders expect “politically painful” new welfare cuts that are designed to reduce the huge growth in health-related benefits.
The moves will be outlined in an upcoming speech from Work and Pensions Secretary Liz Kendall.
In the run-up to the Spring Statement, Cabinet Office Minister Pat McFadden and Health Secretary Wes Streeting will also outline a significant efficiency drive within the civil service, which they hope will lead to significant headcount and cost savings.
The chancellor will argue that the government was always going to “fix welfare to get people back to work” and “make the NHS more productive”.
An insider told the BBC: “Headroom or no headroom, the chancellor is determined to push through the change we need to make Britain more secure and prosperous, with the whole government making that argument in the coming weeks.”
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