Chancellor Rachel Reeves has earmarked several billion pounds in draft spending cuts to welfare and government departments as the Treasury scrambles to maintain fiscal credibility ahead of the Spring Statement on March 26.
Sources indicate that a changing economic landscape has dramatically reduced the financial buffer Reeves had last October, when the Office for Budget Responsibility (OBR) projected she had £9.9bn available to spend under her self-imposed borrowing rules.
However, rising inflation, higher borrowing costs, and global economic factors such as US trade tariffs and the stagnating eurozone economy are expected to erase that headroom.
To offset this, the Treasury is set to propose politically sensitive welfare cuts aimed at reducing the steep rise in health-related benefits. Work and Pensions Secretary Liz Kendall will outline the government’s strategy in a forthcoming speech, emphasising employment-focused reforms.
Treasury officials argue these measures are necessary to uphold their commitment to reducing debt as a share of the economy while only borrowing to fund investment rather than daily spending.
A government insider acknowledged the difficult path ahead, telling the BBC: “Clearly the world has changed a lot since the autumn Budget. The OBR will reflect that changing world in its forecasts later this month, and the Chancellor’s response will be shaped by these economic shifts.”
In a bid to avoid broader public sector cuts or tax hikes, Kendall is working to convince the OBR that new employment initiatives targeting sick and disabled benefit claimants can generate long-term savings.
The Department for Work and Pensions (DWP) has recently published several impact assessments to demonstrate the financial benefits of helping people return to work.
These reports suggest that past employment schemes, such as the Work Choice programme (2010-2018), increased job retention among disabled individuals, with participants experiencing an 11.5% higher employment rate than those who did not take part.
According to a government official: “The assessments make the case that targeted support is the most effective way to get people back to work and reduce spending.”
The DWP is aiming for billions in savings by 2030, with forecasts indicating that health-related benefits could rise from £65bn today to £100bn annually if left unchecked.
Kendall’s reforms are expected to include a radical overhaul of the Work Capability Assessment, which determines financial aid for the sick and disabled. She is also pushing for a portion of welfare savings to be reinvested in employment support programs, ensuring that those who can return to work receive the assistance they need.
The Treasury is also grappling with the economic impact of Reeves’ previously announced tax hikes, set to take effect in April. Business leaders warn that these increases could drive up prices for consumers, adding further inflationary pressure at a time when households are already facing rising energy, water, and council tax bills.
Meanwhile, the government is pushing a civil service efficiency drive led by Cabinet Office Minister Pat McFadden and Health Secretary Wes Streeting, aiming for significant cost reductions.
Despite the fiscal pressures, a senior Treasury official reaffirmed Reeves’ commitment to structural economic reform, saying: “Headroom or no headroom, the Chancellor is determined to push through the changes needed to make Britain more secure and prosperous.”
