UK Finance Minister Rachel Reeves announced significant budget cuts amid global economic uncertainty, with the Office for Budget Responsibility halving growth projections for 2025. The economy is now expected to grow by only 1% this year. The reductions will primarily affect social spending, saving approximately £3.4 billion. Despite increasing public borrowing forecasts, Reeves aims to balance spending with tax revenue by 2030, while concerns about economic stability and potential tariff increases loom.
UK Finance Minister Unveils Budget Cuts Amid Economic Uncertainty
On Wednesday, Rachel Reeves, the British Finance Minister, revealed a significant adjustment to government spending plans, including budget cuts. This comes as global economic uncertainties loom, prompting considerations of potential tax increases within the year.
The Office for Budget Responsibility (OBR), the UK’s primary budget oversight body, has notably halved its economic growth projections for 2025. Their latest estimates suggest that the anticipated recovery by the end of the decade may not fully offset the current economic challenges.
Revised Economic Growth Projections and Impact on Spending
According to the OBR, the UK economy is expected to experience a modest growth of 1% this year, a stark contrast to the earlier forecast of 2% that was presented by Reeves in her inaugural budget last October. The agency projects a GDP growth of 1.9% in 2026 and 1.75% for the remainder of the decade, a downward revision from previous estimates of 1.8% and 1.5% for 2026 and 2027, respectively.
The planned budget reductions will especially impact social spending, decreasing it to 0.3% of GDP, which is forecasted to save the Labour government approximately £3.4 billion, according to OBR predictions. Reeves emphasized that the growing uncertainty in the global economy has led to instability at the national level, affecting business models and increasing borrowing costs for several major economies.
Despite the upward revision of public borrowing forecasts by the OBR, Reeves assured adherence to fiscal rules and announced the restoration of a fiscal reserve amounting to £9.9 billion. “Thanks to the measures I have taken today, I can confirm that I have fully restored our fiscal reserve,” she stated during her spring statement.
Reeves has set a goal to balance public spending with tax revenue by 2030, although yields on British sovereign bonds initially rose following her announcements before settling back down as the UK Debt Management Office indicated fewer bond issuances than anticipated for 2025 and 2026.
As of 3:20 PM GMT, the yield on the 30-year British Gilt had decreased by 5.5 basis points to 5.313%, after briefly rising by 3 basis points post-announcement.
Concerns Over Economic Stability and Future Borrowing Needs
The fiscal reserve of £9.9 billion remains at a historically low level, rendering it susceptible to economic slowdowns and the potential rise in borrowing costs, particularly with the looming risks of increased tariffs from the United States. If the US were to raise these tariffs by 20 percentage points, British growth could drop by 1% compared to its expected peak in 2026-2027.
The OBR has also revised its inflation forecasts upward, predicting an average price increase of 3.2% in 2025, up from a previous estimate of 2.6%. Inflation is anticipated to rise by 2.1% in 2026 and 2% in 2027.
As the economic landscape continues to evolve, analysts caution that if conditions worsen, Rachel Reeves may find herself revisiting the necessity of further spending cuts or tax increases, despite previous commitments made to voters regarding income tax stability.