Rachel Reeves Faces Budget Squeeze as Growth Forecast Declines

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Britain’s economic outlook has taken a hit as the country’s fiscal watchdog revises its growth forecast downward, sparking concerns about imminent spending cuts and potential tax increases. The Office for Budget Responsibility (OBR) has informed Chancellor Rachel Reeves that the nearly £10 billion of fiscal headroom she reserved during the last budget has now vanished due to weaker-than-expected economic growth and rising borrowing costs, according to a report by Bloomberg.

 

This private forecast is the first of five assessments the OBR will present to Reeves before she delivers her spring financial statement. Given her commitment to limiting the budget to a single announcement per year, economists anticipate that the spring statement may usher in further spending cuts to maintain fiscal balance, with tax increases potentially following later in the year.

 

According to Bloomberg, the OBR’s latest assessment indicates that Reeves will now be facing a small deficit. Andrew Griffith, the shadow business secretary, criticized the chancellor’s handling of the situation, stating that she was demonstrating “particular ineptitude” by potentially failing to adhere to her own fiscal rules.

 

“Who pays the price? Small businesses, any entrepreneurs still left in the UK — and everyone’s children and grandchildren,” Griffith remarked, highlighting the broader economic repercussions of the downgrade.

 

Economists have expressed alarm at the lack of fiscal flexibility, cautioning that Britain’s financial position leaves little room to absorb economic shocks. The National Institute of Economic and Social Research echoed these concerns, emphasizing that without changes to tax policies or spending plans, the government may struggle to respond effectively to future economic disruptions.

 

“There will be no space for extra expenditure in response to a shock or the need for higher public investment to get growth going for as long as the self-imposed constraints on tax remain,” the institute stated.

 

“Our forecast indicates that zero fiscal headroom remains as the current budget is exactly balanced at the end of the forecast period. Without changing taxation and spending plans, this means that there is no buffer through which to absorb cyclical economic shocks were they to materialise over the remainder of parliament.”

 

As Reeves prepares for her upcoming financial statement, she faces mounting pressure to navigate the economic downturn while maintaining stability. With spending cuts looming and tax rises on the horizon, the government’s economic strategy will be closely scrutinized in the months ahead.

 

Based on a report by Daily Telegraph 2025-02-14