As the UK braces for a critical fiscal policy update next week, the economic landscape presents a challenging tableau for Chancellor Rachel Reeves. The latest data reveals a troubling spike in public sector net borrowing, which reached £10.7 billion in February—£4.2 billion more than what the Office for Budget Responsibility (OBR) had anticipated. This surge in borrowing is not just a temporary blip; it signifies a broader trend that has seen the UK accumulate a staggering £132 billion in debt over the first 11 months of the 2024–25 financial year. Projections indicate that if current trends continue, the full-year borrowing could balloon to £151 billion, surpassing the OBR’s October forecast by £23 billion and eclipsing earlier estimates made just months prior by a concerning £63 billion.
The implications of this borrowing surge are far-reaching. Rising interest payments, which totaled nearly £9 billion in February alone, are straining public finances further. Analysts warn that the markets are now adjusting to a reality of prolonged high interest rates, suggesting that annual debt servicing costs could escalate by an additional £6 billion by the 2029–30 fiscal year. This precarious situation leaves Reeves with few options as she prepares for the upcoming Spring Statement, where a fiscal tightening of around £10 billion—or 0.3 percent of GDP—is expected.
Indeed, the economic forecast has shifted dramatically since the Chancellor’s first Budget announcement in October. A recent analysis by Capital Economics articulated the gravity of the situation, noting that Reeves could hardly have anticipated the worsening conditions that have unfolded over the past four months. The anticipated fiscal tightening is likely to emerge from cuts to welfare and non-defence spending rather than tax increases, a strategy that could dampen GDP growth by approximately 0.1 percent by 2026-27.
Additionally, the UK’s commitment to ramping up defense spending to 2.5 percent of GDP by 2027, with an aim to reach 3 percent within the decade, creates further fiscal pressure. This commitment could lead to a looser overall fiscal stance, with economists cautioning that such spending pressures may have long-term implications for economic growth, interest rates, and government bond yields.
Isabel Stockton, a senior research economist at the Institute of Fiscal Studies, has highlighted the considerable challenges that Reeves faces as the Spring Statement approaches. The Treasury’s goal is to ensure that debt is on a downward trajectory and that borrowing is reduced to below 3 percent of GDP by the year 2029-30. However, as of October, the government was only marginally on track to meet this objective.
Reeves’s fiscal commitments—specifically her promises to avoid new taxes and refrain from returning to austerity measures for public services—have effectively boxed her in, limiting her options to three primary courses of action: increase taxes, cut spending, or amend fiscal rules. However, the prevailing sentiment among economists is that tax hikes and relaxed fiscal rules are politically fraught and therefore unlikely. Instead, there is an 80 percent likelihood that the Chancellor will resort to a new round of spending cuts, potentially affecting departmental budgets and welfare reforms.
The government has already signaled its intent to fund defense spending increases by reallocating foreign aid and green investment funds. A recent welfare reform package announced is projected to save over £5 billion by 2029-30, but the bulk of the necessary cuts may need to come from departmental budgets. Analysts suggest that Reeves might opt to announce cuts that would take effect in 2029-30, thereby sidestepping immediate allocation issues in the upcoming Spending Review set for June 11. However, such a delay could be perceived by investors as lacking credibility.
As the Spring Statement looms, it coincides with the implementation of tax hikes announced in October, which include increases to employers’ national insurance contributions and adjustments to the national living wage and minimum wage—measures that have already faced significant backlash from businesses across various sectors. Shadow chancellor Mel Stride has characterized Reeves’s October Budget as “anti-business,” claiming that it has “killed growth stone dead.” He has urged her to reconsider her economic policies, asserting that the current course is detrimental to both businesses and the broader economy.
Ultimately, as the government navigates this turbulent fiscal terrain, the decisions made in the coming weeks could reverberate through the economy for years to come. The interplay between necessary spending cuts and the imperative to stimulate growth will be a delicate balance for Chancellor Reeves, as she seeks to restore fiscal stability while addressing the growing concerns of both the public and business sectors. The stakes could not be higher as the UK stands at a fiscal crossroads, with a clear need for both prudent management and visionary economic policy.
