The official economic growth forecast for this year will be cut in half next week in what will be a serious setback for Sir Keir Starmer and Rachel Reeves.
As the chancellor prepares to unveil a swathe of spending cuts at next week’s spring statement, the government’s spending watchdog is set to lower the expected growth rate for 2025 from 2 per cent to about 1 per cent.
The Office for Budget Responsibility’s (OBR) downgrade is a major blow for the government, with Sir Keir having repeatedly said economic growth is his top priority.
Ms Reeves will use her speech on Wednesday to attempt to blame the steep drop on the worsening global economic outlook as Donald Trump imposes trade tariffs on some goods imported to the US, The Telegraph reported.
But the downgrade could force Ms Reeves to turn to fresh tax hikes or steeper than expected spending cuts to meet her self-imposed borrowing rules.
And it came as official figures showed government borrowing soared above forecasts last month due to sharp increases in public spending.
The Office for National Statistics (ONS) said public sector net borrowing was £10.7bn in February – £100m more than the same month last year and the fourth highest in February on record.
Capital Economics UK economist Alex Kerr said: “Although they will have no impact on the fiscal update next week, the significant overshoot in borrowing in February highlights the chancellor’s tight fiscal backdrop. The OBR will still most likely conclude that the chancellor’s headroom against her fiscal rules has been wiped out.
“We expect her to announce further non-defence spending cuts, on top of the welfare cuts already unveiled earlier this week.”
Since the general election in July, the economy has been stagnant, with critics rounding on Ms Reeves for her £40bn tax-hiking October Budget.
After figures showed the economy shrank in January, the Conservatives branded the party “growth killers”.
With the lack of economic growth adding to the pressure on the public finances, Ms Reeves will reportedly announce plans to cut Whitehall budgets by billions of pounds more than previously expected, with some departments facing cuts of up to 7 per cent over the next four years.
The expected cuts come just days after work and pensions secretary Liz Kendall unveiled £5bn cuts to the welfare system, with growing fears Britain is facing a return to a Tory-like austerity agenda.
Chief secretary to the Treasury Darren Jones insisted said on Thursday it would be “factually incorrect” to say Labour is implementing a fresh round of austerity.
“The numbers will be published next Wednesday, but as you saw at the Budget last year, we are increasing public spending, and we've increased it quite a lot,” Mr Jones said.
Austerity is a term for government policy designed to control national debt, which was adopted in Britain following the 2008 financial crisis and led to major cuts to public services.
News of the growth forecast being slashed comes a day after the Bank of England held interest rates at 4.5 per cent amid mounting global uncertainty and growing trade tensions sparked by President Trump.
Interest rates are expected to fall further this year, but only two more cuts are expected in 2025 as the BoE tries to keep inflation under control, while costs rise for businesses and the wider economic outlook remains uncertain.
While the UK has yet to implement any retaliatory tariffs on the US, an escalating trade war could significantly hit economic growth and push up prices.
Heathrow closure to cost UK economy up to £4.8m in lost tourism
Government borrowing has soared – what now, Rachel Reeves?
Dropkick Murphys break silence after confronting Trump fan at concert
Ukraine war live: Putin ‘bombs Russian gas pipeline to sabotage ceasefire’
Stanley Tucci and Stephen Fry call on Starmer to rethink ‘shameful’ benefit cuts
‘Nothing off the table’ over British troops deployed to Ukraine - live
