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Chancellor Rachel Reeves is facing a Labour backlash over welfare cuts, after she was forced to make last-minute savings to help balance the books in what is expected to be a grim Spring Statement on the economy on Wednesday.
Government officials said ministers had been forced to find £500mn of new cuts after a dispute with the Office for Budget Responsibility over how much welfare changes announced last week would save.
Labour MPs were already nervous about the welfare cuts — which work and pensions secretary Liz Kendall claimed would save £5bn a year — with public and private criticism of the plans mounting.
But the OBR then disputed the £5bn number and — even after additional last-minute cuts — has estimated that the savings will only save £3.4bn, according to people briefed on the forecasts. Reeves will therefore have to make cuts elsewhere.
Reeves will publish new OBR economic forecasts at about 12.30pm on Wednesday, which are expected to see the 2025 growth forecast halved from 2 per cent to about 1 per cent.
The chancellor has been left with a fiscal hole of about £15bn compared with her plans at her October Budget, which she will fill largely through cuts to public spending.
Reeves will publish alongside the OBR forecasts the government’s own impact assessment of welfare changes, which will spell out to Labour MPs the impact on some of the poorest in society.
Government officials said that universal credit incapacity benefits for new claimants will now be frozen until 2030 rather than increased in line with inflation, as part of the last-minute cuts.
Reeves, who will speak for about 25 minutes, will claim she has forced to change economic tack because “the world is changing” — a reference to how Donald Trump has upended the global economic and security environment.
She will try to look on the bright side, pointing to efforts to secure an economic deal with the US in the coming days to avert punitive Trump tariffs. Reeves will also note efforts to secure closer trade ties with the EU.
The chancellor will also boost the UK’s defence spending by £2.2bn next year, arguing that the extra investment would help bolster British jobs and skills.
Reeves will insist on Wednesday she is providing “security” for the British people — both militarily and economically — but her speech to MPs will be dominated by dismal growth data, the yawning fiscal hole and an admission that things could get worse.
The extra military funding, which will come from new cuts to the overseas aid budget and the Treasury reserve, will take UK defence spending to 2.36 per cent of GDP in the 2025-26 financial year.
Reeves has already said military expenditure will hit 2.5 per cent in 2027 — an extra £6.4bn — funded by a raid on the foreign aid budget.
“As defence spending rises, I want the whole country to feel the benefits too,” she will say. John Healey, defence secretary, said the country faced “tough times”.
The chancellor’s address to MPs takes place in the shadow of Donald Trump, whose election as US president has forced Britain to increase defence spending.
Reeves has admitted that a Trumpian global trade war would create economic “headwinds” and further damp growth. Ministers deny Conservative claims that the chancellor is heralding a new era of “austerity”.
Darren Jones, chief secretary to the Treasury, on Tuesday briefed 75 ministers on the Spring Statement plan, which is expected to include a cut of at least £5bn a year from Whitehall spending totals later in the parliament. This will be on top of the welfare savings.
Jones insisted this was not “austerity”, pointing out that real spending on public services would rise every year in this parliament and was growing from a higher base, following Reeves’ big injection of cash into the NHS and other areas in her October Budget.
Paul Johnson, head of the Institute for Fiscal Studies think-tank, said talk of austerity “is way overblown in the context of what the government announced in October and by comparison with stated plans of the last government”.
However, if the economy continues to grow at a sluggish pace and a global trade war escalates, the chancellor could be forced to come back with more spending cuts — or tax rises — in her autumn Budget.
Meanwhile, Reeves is battling negative sentiment over her handling of the economy. A YouGov survey found that only 16 per cent of voters thought the government was handling the economy well. Just 11 per cent hold a positive view of Reeves’ performance.
