LONDON: The UK government halved its 2025 growth forecast on Wednesday as it made billions of pounds of spendings cuts to shore up the public purse in the face of economic headwinds.
The Spring Statement spending update came as the Labour government, elected in July after a landslide election win, faces sluggish economic growth and rising borrowing costs.
Britain’s economy is expected to grow by just one percent this year, revised down from an estimate of two percent made in late October when Labour gave its inaugural budget. However, the Office for Budget Responsibility, the UK’s spending watchdog, upgraded the country’s growth forecast for the three following years.
“Our task is to secure Britain’s future in a world that is changing before our eyes,” finance minister Rachel Reeves told parliament in the highly-anticipated update. Concerns over US tariffs and the war in Ukraine have added to the UK’s economic woes, chipping away the government’s fiscal cushion.
“The threat facing our continent was transformed when (Russian President Vladimir) Putin invaded Ukraine,” Reeves said. She added that “the job of a responsible government is not simply to watch this change, this moment requires an active government”.
Prime Minister Keir Starmer has recently pledged to hike spending on defence, with the government confirming Wednesday a GBP2.2 billion ($2.8 billion) boost next year. To avoid slipping into a deficit, Reeves has cut disability welfare payments and government departmental budgets, blaming a period of heightened uncertainty in global markets.
Public spending cuts
Reeves’s attempts to mend public finances were constrained by her own fiscal rules and her pledge not to increase taxes.
The rules prevent her from borrowing to fund day-to-day spending and call for debt to fall as a share of the gross domestic product by 2029-2030. Ahead of Wednesday’s update, the centre-left government announced it would slash the cost of running the civil service by 15 per cent over the next five years, targeting annual savings of around GBP2 billion.
It has unveiled also contested cuts to disability welfare payments, in the hopes of saving billions annually by the end of the decade. While Labour has highlighted increased funding for housing, the struggling National Health Service, and reforms to workers’ rights, it is spending cuts that have remained in the spotlight.
The cuts added to criticism piled on Labour after it scrapped a winter-fuel benefit scheme for millions of pensioners last year. Higher business tax comes into effect from April, pressuring businesses facing also a hike to the minimum wage.
In a glimmer of good news, official data showed Wednesday that Britain’s annual inflation rate eased to 2.8 per cent in February, down from 3.0 per cent in January. But despite the slowdown, inflation remains elevated above the Bank of England’s 2.0 per cent target. The central bank kept interest rates unchanged last week after a series of cuts, warning of “economic uncertainty”.