The UK government has just revealed new plans to cut public spending as it needs to fill a gaping fiscal hole, after the lack of economic growth and the increased cost of borrowing are eating into state revenue.
Britain's Treasury chief Rachel Reeves said that "final adjustments" to the already announced cuts in the welfare system would save £4.8 billion (€5.74bn). She was addressing Parliament about the state of public finances in her Spring Statement on Wednesday.
“While spending on disability and sickness benefits will continue to rise, these plans mean that welfare spending as a share of GDP will fall starting in 2026,” Reeves said.
She promised £1.4bn (€1.67bn) in total to help people return to work, combined with cuts to welfare benefits.
The chancellor promised significant belt tightening, proposing to reduce state operational costs by 15%, worth £2bn (€2.4bn) by the end of the decade.
The government will increase defence spending to 2.5% of GDP from April 2027 and simultaneously reduce overseas aid to 0.3% of gross national income, according to the chancellor.
“This means we save £2.6 billion in day-to-day spending in 2029-30 to fund our more capital-intensive defence commitments,” she said.
The government will provide an additional £2.2bn (€2.6bn) for the Ministry of Defence starting in the next financial year.
“This additional investment is not just about increasing our national security, but increasing our economic security too,” Reeves added.
Only 1% of GDP growth for 2025
According to the latest forecast from the UK’s independent public finances watchdog, the British economy is greatly in need of a boost. The Office for Budget Responsibility (OBR) has halved its UK growth forecast, expecting only 1% of GDP growth for the year, instead of the 2% it forecasted last autumn.
In a disrupted global trading environment filled with uncertainty, the UK economy has been struggling with modest performance since mid-2024. Business sentiment has weakened as many are concerned about the incoming tax increases and the above-inflation rise in the minimum wage. Both will take effect in April.
The British economy, the sixth-largest in the world, eked out modest growth of 0.1% in the fourth quarter, a hugely disappointing outcome for the new Labour government, which has made boosting growth its number one economic policy. Since the global financial crisis in 2008-2009, the British economy’s growth performance has been notably below its long-term average.
Critics say Reeves is partly responsible for gloomy economic news since Labour returned to power in July after 14 years, because she was overly downbeat when taking on her role and has since increased taxes, particularly on businesses.
She received some welcome news on Wednesday, with official figures showing that price rises in the UK moderated by more than anticipated in February. The Office for National Statistics said consumer price inflation fell to 2.8% from 3% the previous month.
Inflation, however, is expected to be higher this year. The OBR predicts price pressures at 3.2%, revised from 2.6% in 2025. In 2026, this figure is forecasted at 2.1%, revised from 2.3% in 2026. The OBR expects that inflation will meet the Bank of England’s 2% target in 2027.
As for the British economy’s longer-term prospects, the OBR forecasts a GDP growth of 1.9% in 2026, 1.8% in 2027, 1.7% in 2028, and 1.8% in 2029.
The chancellor confirmed that there are no more tax hikes on the cards for this budget, after she presented a £40bn (€47.8bn) rise in levies last autumn. However, new measures to crack down on tax avoidance are projected to bring in an extra £1bn in savings, rounding up the total income from reducing tax evasion to £7.5bn (€9bn).
According to the chancellor, the deficit will be £36.1bn in 2025-26 and £13.4bn in 2026-27. The budget is expected to present a surplus of £6bn in 2027-28.
How analysts see the Spring Statement
“Today’s Spring Statement did not come attached with the substantial spending cuts some predicted”, Lindsay James, investment strategist at Quilter, said.
”Cuts to government spending now mean real spending increases of 1.2% rather than the 1.3% that was planned, and is better than many thought possible.”
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “The economic forecasts made for less grim reading than expected, after Rachel Reeves introduced a surprise twist in the tale. The forecast for growth has been cut for this year, but it has been hiked for every other year of the forecast.”
She also added: “There’s not a vast amount of space in the budget, so if we don’t get the growth the government is hoping for, there could be tax rises lurking in the autumn Budget.”
