Reeves eyeing spending cuts as fiscal walls cave in
Rachel Reeves is expected to take the chop to spending in her upcoming Spring Statement, as the government’s fiscal headroom disappears.
The Office for Budget Responsibility (OBR) is set to show a depletion in the Chancellor’s headway, according to BNP Paribas economists.
This leaves the government with little options beside further tax hikes or spending cuts.
BNP Paribas anticipate Reeves honouring current fiscal rules “as a sign of good faith for the market” and do not expect any alterations.
The Chancellor is instead expected to take the axe to spending, in which Reeves would face another battle after pledging not to return the UK to austerity.
Meanwhile nearly half of the fund groups in Quilter’s latest Trend Survey said spending cuts alone were the best option to manage current economic woes.
Spring Statement has taken on ‘huge importance’
Increased tension over the war in Ukraine has already led the government to use cuts in the foreign aid budget to raise defence spending to 2.5 per cent of GDP by 2027.
However, 35 per cent of fund groups expected a mix of cuts and tax hikes when Reeves delivers the Spring Statement on March 26.
Only six per cent expected tax increases alone – “suggesting that Labour may have gone far enough for now on tax raising policy”.
Quilter investment strategist, Lindsay James, said: “The reaction to October’s Budget has clearly put a strain on business confidence and investors are rightly questioning where the growth is going to come from.
“The Spring Statement has taken on a huge amount of importance given the recent moves in gilt yields and cuts to growth forecasts, and Rachel Reeves is quickly running out of room to manoeuvre.”
James said investors are anticipating a degree of spending cuts, but the UK economic woes “lie deeper than the recent gilt yield moves and will take more than short term-measure to fix”.
James added continued weak sentiment from businesses and consumers may result in further rate cuts from the Bank of England.
Following the Autumn Budget, Reeves had left herself a £9.9bn buffer to stay on track of her key fiscal rule for day-to-day spending to be funded by tax receipts.
In the fourth quarter, growth ticked up 0.1 per cent, in a modest sigh of relief for Reeves, but a weakened forecast from the OBR dampened the picture.
The fiscal watchdog’s downgrade, as first reported by Bloomberg, cleared the Chancellor’s elbow room and helped propel further recession fears.
The Chancellor has staked her political reputation on unleashing growth across the UK economy, but thus far performance has been sluggish.
The Quilter survey showed forecasts for 2025 GDP growth had slipped to 1.1 per cent from 1.25 per cent in the previous quarter.
The Office for National Statistics (ONS) will release growth figures for January this Friday, which will follow the surprising 0.4 per cent rise in December.