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The government briefing that Rachel Reeves will make large spending cuts this month is very significant, in several different ways.<\/p>\n
First, it confirms what had been rumoured – that the Office for Budget Responsibility (OBR), the independent forecaster, believes that the chancellor’s ‘headroom’ has been eliminated. <\/p>\n
This is the \u00a310bn worth of leeway which, as of last October, the OBR believed the government had before breaking its self-imposed borrowing rules.<\/p>\n
Why has that headroom disappeared? The government’s clear view is that this is because of global factors – tariffs being imposed by President Trump, broader uncertainty emanating from the new US administration, persistent inflation in the UK and elsewhere, and the rising cost of government borrowing.<\/p>\n
But there will be a big political argument about this. <\/p>\n
The Conservatives will contend that the cost of government borrowing was rising even before President Trump took office and that the tax rises in Reeves’s Budget in October were a major factor, as well as in stunting growth.<\/p>\n<\/div>\n
Relatedly, it is worth stressing that this month was not meant to be a big economic moment for the government. <\/p>\n
Over recent years, a fiscal rhythm has developed where there is one Budget a year and then a second (spring or autumn) statement which also contains significant tax and spend measures and is akin to a mini-budget.<\/p>\n
Reeves wanted to end that, with an autumn Budget<\/a> and then a much more limited event in spring at which the OBR published updated forecasts but the government did not respond with major economic measures. <\/p>\n Government sources say that this will not be a fiscal event because it will not include tax rises, only spending cuts.<\/p>\n Yet the Charter for Budget Responsibility, recently updated by the Labour government, said that it was committed to one major fiscal event a year in order to “give families and business more certainty” not only about tax but “spending changes” too. <\/p>\n The government did reserve the right to change that approach “in the case of an economic shock”. <\/p>\n Does that mean the government believes the effect of President Trump has been an economic shock?<\/p>\n There are clear political sensitivities in where the cuts are likely to fall. The Labour Party has many factions and ideological nuances but all of its MPs are committed to a generous welfare state and many will be antsy at the prospect of welfare cuts. <\/p>\n Those in government are adamant, though, that the numbers – which are rising fast – of claimants and the amount being spent by government are simply unsustainable. <\/p>\n There will be reform as well as cuts – Reeves has identified what she sees as “perverse incentives” in the system.<\/p>\n Notably the next target for cuts appears to be the civil service. <\/p>\n Privately ministers and officials have been dismayed by the quality of the Whitehall machine. <\/p>\n The government is expected to demand major reductions in the numbers of civil servants, though this is unlikely to take the form of a specific numerical target. <\/p>\n Ministers are also understood to have discussed major change<\/a>s to the machinery of government, namely how government departments are organised, though this work is considered unlikely to come to fruition this month.<\/p>\n<\/div>\n