Reeves will not raise taxes in Spring Statement, say officials

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Chancellor Rachel Reeves will not raise taxes in next week’s Spring Statement, Labour officials said, as they tried to dismiss Conservative claims that she is preparing an “emergency Budget”.

Reeves will instead turn to public spending reductions — a combination of welfare cuts and savings to the planned budgets of Whitehall departments — to rebuild adequate headroom against her fiscal rules.

Reeves’ allies said she was determined to reassure financial markets by maintaining a “reasonable” amount of headroom. “The markets are watching us carefully,” said one.

Higher borrowing costs and sluggish growth are expected to have wiped out most or all of the £9.9bn of headroom that the UK fiscal watchdog said Reeves had at the time of her October Budget.

Government officials rejected suggestions Reeves would try to substantially increase that cushion — a move which would need larger spending cuts than those currently expected. 

“We want a buffer but we’re not playing a numbers game,” said one. Reeves’ fiscal rule stipulates that current spending must be matched by tax receipts by 2029-30.

Kemi Badenoch, Conservative leader, claimed in the House of Commons on Wednesday that Reeves’ fiscal plans were so threadbare that she was being forced to hold “an emergency Budget next week”.

But Labour officials said Wednesday’s Spring Statement would have no tax rises and any fiscal measures would be announced in an autumn Budget.

“You do tax at a major fiscal event — this isn’t one,” said a Reeves aide, referring to the Spring Statement.

The chancellor has already identified some savings to rebuild her headroom, including £5bn of welfare cuts announced by Liz Kendall, work and pensions secretary, on Tuesday.

In addition, the government’s decision to shift a portion of its overseas development budget to defence, to raise military spending to 2.5 per cent of GDP by 2027, will give the chancellor extra flexibility. 

This is because some defence spending is categorised as investment, which is exempt from Reeves’ budget rule.

She will use the statement to unveil a fresh squeeze on departmental spending from 2026-27, according to people briefed on her plans. 

That timeline encompasses the period of the government’s upcoming spending review, the results of which will be announced in June, as well as the final year of the parliament.

Paring back annual real-terms growth in day-to-day departmental spending to about 1.1 per cent from 2026-27, compared with an average rate of 1.3 per cent planned in the October Budget, could save the government billions of pounds. 

The Institute for Fiscal Studies, a think-tank, estimates that a real-terms spending growth rate of about 1.1 per cent would save £5bn a year by the end of the parliament, based on the Office for Budget Responsibility’s October inflation forecast.

Some economists have criticised Reeves for failing to build up a larger amount of headroom than the £9.9bn estimated by the OBR last October.

That buffer was the third smallest of 28 forecasts made by the OBR since it was established in 2010.