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Rachel Reeves will not hold an emergency tax-raising Budget next spring in the event low growth or other setbacks blow a hole in her fiscal plans, the Treasury has insisted, pointing to a spending squeeze if action was needed.
Disappointing growth data last week showed the UK economy shrank for the second month in a row in October, raising the risk that official forecasts in the spring will show the chancellor on course to breach her fiscal rules.
Reeves is currently set to meet her main fiscal rule that day-to-day spending is funded only by tax by 2029-30 by a £9.9bn margin, making her plans vulnerable to downgrades in growth expectations or rising borrowing costs. Given annual public spending of £1.3trn, the margin is tight.
The Office for Budget Responsibility will produce new forecasts in the spring on whether the chancellor will meet her rule.
The Treasury said Reeves remained committed to “one major fiscal event every year”, an autumn Budget. Officials added that would be when the chancellor would announce any tax and borrowing changes, suggesting spending cuts would occur in the spring if fiscal tightening was required.
“We’re not going to pre-empt the forecast, however no one should be under any doubt of the chancellor’s commitment to economic stability and sound public finances,” the Treasury said. “That is why meeting the fiscal rules is non-negotiable and we will plan for all scenarios.
“The chancellor has been clear that she would not repeat the likes of the October Budget again and is now focused on growing the economy and rooting out waste in public spending through the second phase of the spending review.”
Treasury officials pointed to Reeves’ comments this month to the Daily Mail in which she left open the possibility of further tax rises next autumn.
“I’m not going to be going back in the spring. That’s what the previous government did. They did a Budget and then came back six months later,” Reeves told the Daily Mail.
The chancellor also last month told the CBI business conference she was “not coming back with more borrowing or more taxes”, a comment widely taken to exclude such measures for the rest of the parliament. Reeves and Number 10 later insisted she was not tying her hands for future Budgets.
Official figures showed GDP fell by 0.1 per cent in October, following a similar contraction the prior month, raising concerns that disappointing growth could put the public finances under renewed pressure.
Ruth Gregory, at Capital Economics, said she expects the level of GDP to be 0.7 per cent lower by the end of this year than was predicted at the October Budget.
If this weakness persists in future years, it could lower the chancellor’s headroom by as much as £13bn, erasing that headroom, she said.
However, she stressed that the OBR was likely to judge that the current economic weakness is a temporary problem, limiting the damage to the chancellor’s fiscal headroom.
Reeves has said she wants to end the recent practice of the Treasury preparing two major fiscal events a year. She wants her officials to spend the next six months instead focusing on measures to boost growth.
However the chancellor is expected to give an economic statement alongside the OBR forecasts in the spring. Treasury officials cite the spring statements given by former Conservative chancellor Philip Hammond — pared-back events with a few spending announcements — as a template.
Hammond, like many of his predecessors, also wanted to hold only one Budget a year, but recent crises including the financial crash, Brexit and Covid have often pushed chancellors into holding two such events a year.
