Reeves’ repair job avoids tax rises — for now

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The chancellor called it a Spring Statement. The Conservatives called it an Emergency Budget. In practice, Rachel Reeves’ 33-minute statement to MPs had all the hallmarks of a holding operation.

The central feature of the chancellor’s statement was an explanation of how she would fill a £14bn fiscal hole that has opened up since her Budget in October, the result of rising borrowing costs and stagnant growth.

It was a repair job, carried out through a mixture of welfare cuts, reductions in planned day-to-day spending, a crackdown on tax evasion and a blitz on civil service efficiency, all announced with minimum fuss.

But the inescapable sense from Reeves’ speech was that the main purpose of the Spring Statement was to keep the fiscal show on the road. The next six months look likely to present a much bigger economic and political test.

“The world is changing — we can see it and we can feel it,” Reeves told MPs. She did not mention Donald Trump by name, but the US president cast a shadow over the chancellor’s speech.

Whether it was her promise to fund a British rearmament programme or her warning that global trade patterns could become “more unstable”, the menace to Britain’s economy from the Trump presidency is clear.

The Office for Budget Responsibility highlighted the fact that Reeves’ £9.9bn shock absorber fund against her key fiscal rule — to balance current spending with tax receipts by 2029-30 — was fragile.

It said this was only a third of the average figure — £31.3bn — set aside by previous chancellors since 2010. If things go wrong, Reeves will have some tough choice in her autumn Budget — including potential further tax rises.

Oliver Dowden, former Tory deputy prime minister, told the Financial Times: “She has exhausted the Labour party’s appetite for spending cuts. When she comes back in the autumn with tax rises, she will be in big trouble.”

Many Labour MPs are already extremely nervous about the £3.4bn of net welfare savings being lined up by Reeves; a government impact assessment of the policy has filled some with dread.

It found that a quarter of a million people, including 50,000 children, will be pushed into relative poverty as a result of the welfare reforms. “The mood is grim,” said one veteran Labour MP. “You won’t see a big revolt or anything but people are being ground down.”

Cuts to day-to-day departmental spending are already being resisted by some cabinet ministers and are being labelled as “a return to austerity” by a Conservative party long associated with the phrase. Further big cuts will carry a political price.

Reeves hopes that the worst can be avoided and that Britain can seal a speedy trade deal with Trump to avoid the most punitive US tariffs. But Britain will be hit like all other economies by a global trade war, something the OBR warned may wipe out the headroom she plans to restore through Wednesday’s measures.

The chancellor is also expected to step up demands for Sir Keir Starmer to use his “reset” talks with the EU in the coming weeks to push for a growth-enhancing economic partnership.

But any economic deterioration could force Reeves to come back to the question of higher taxes, only a year after she announced £40bn of tax increases, £25bn of which fell on employers through higher national insurance payments.

Given that she ruled out any increases in income tax, employee national insurance contributions or VAT, her room for manoeuvre is increasingly constrained.

There were other economic warning signs. The OBR suggested that mortgage interest rates will be 0.2 percentage points higher over the forecast period than it expected in October.

The forecaster also presumed that 76 per cent of the cost of the NICs rise will be passed on to workers “via lower real wages”. It said most surveys of business leaders point to a substantial reduction in nominal wages.

There were some bright spots in Reeves’ statement that will have given Labour MPs cheer. The OBR reckons that planning reforms will boost growth and it has raised its growth forecasts for later in the parliament to about 1.75 per cent, even as it slashed this year’s prediction to just 1 per cent.

Reeves claims that higher defence spending, rising to 2.5 per cent of GDP in 2027, will underpin a defence and industrial renaissance in Britain. The OBR also welcomed the government’s plans to increase housebuilding.

The summer will see Reeves oversee a new industrial strategy and conclude a “zero-based review” of all public spending. “This is a government with the courage to step up,” she insisted.

Although the Spring Statement was a tough moment for Reeves, there was a sense among MPs drifting out of the House of Commons chamber that the next six months will be even more testing — and are likely to define her time as chancellor.