Reeves to make further welfare cuts but boost defence

Chancellor Rachel Reeves is set to make further cuts to welfare benefits and government departments in her Spring Statement on Wednesday.

The government announced big welfare spending reductions last week but the chancellor is set to expand the cuts after being told reforms to the system would save less than planned.

The chancellor faces pressure over the performance of the economy, with growth remaining sluggish despite being the government’s top priority in order to improve living standards.

But Reeves will argue the UK has to “move quickly in a changing world” and will confirm a £2.2bn increase in defence spending.

In her Spring Statement at 12:30, where the chancellor will set out her latest plans for the UK economy, she will cite uncertainty surrounding the Ukraine war and US tariffs threatening to upend global trade.

Reeves, who ruled out tax rises in the statement, has already announced several spending cuts but will say she is “proud” of what Labour has delivered in its nine months in power.

She will attempt to put national security at the heart of her plan to “kickstart economic growth”, saying the increase in defence spending is “not just about increasing our national security but increasing our economic security, too”.

“The job of a responsible government is not simply to watch this change,” she will say.

“This moment demands an active government stepping up to secure Britain’s future… We need to go further and faster to kickstart growth, protect national security and make people better off through our plan for change.”

The government announced earlier this month that it would cut the foreign aid budget to increase military spending to 2.5% of national income by 2027.

“As defence spending rises, I want the whole country to feel the benefits,” the chancellor will say.

But some economists have argued the increase in defence spending will have a limited impact on economic growth.

Late on Tuesday, it emerged that Reeves would widen her cuts to welfare after the Office for Budget Responsibility (OBR), which monitors the government’s spending plans, estimated the welfare system reforms would not save the £5bn as planned.

The reforms include stricter tests for personal independence (Pip) payments, affecting hundreds of thousands of claimants.

But it is understood the OBR assessed that many claimants facing losing health-related benefit payments would instead claim for more severe conditions.

The Government did not deny reports, first carried by The Times, that the chancellor would make further cuts to try to make up some of the shortfall.

A combination of low economic growth and higher interest rates on government borrowing in recent months has also dealt a blow to Reeves, who has made a series of spending cuts and other adjustments to ensure she sticks to her self-imposed and “non-negotiable” rules on borrowing and debt.

These rules are not to borrow to fund day-to-day public spending, and to get government debt falling as a share of national income by the end of this parliament.

Sticking by her decision not to increase taxes further, the chancellor will unveil more details of the £5bn worth of cuts to welfare – the biggest single reduction in a decade – and the squeeze on other government spending.

Reeves has confirmed plans to tell Civil Service departments to cut administrative budgets by 15%, and announced £2bn of funding for affordable homes in England.

After she has given her Spring Statement, the latest official economic forecast from the OBR will be published.

It is widely expected the watchdog will lower its growth expectations for the UK. In its forecast at the Budget, it predicted the economy would grow 2% in 2025 and 1.8% in 2026. The Bank of England has cut its growth forecast to 1%.

Latest figures from the Office for National Statistics estimate he economy grew by just 0.1% between October and December 2024, while the latest monthly figures show it shrank by 0.1% in January.

When an economy is growing slowly – or contracting – businesses might not take on more workers or give pay rises. Lower profits mean firms pay less in tax, which funds government spending.

Businesses are set to see costs rise in April when minimum wage rates increase and National Insurance contributions paid by employers go up. This could be passed on to consumers through higher prices.

On Wednesday, the OBR will state whether it thinks the government will stick to its self-imposed rules on borrowing and spending.

It is expected to confirm that low growth and higher government borrowing costs are making it much harder for Reeves to meet her rules.

Fiscal rules are self-imposed by most governments in wealthy nations and are designed to maintain credibility with financial markets.

Ahead of her statement, Reeves has sought to blame the worsening state of the public finances on a global rise in borrowing costs.

Economists have suggested high borrowing costs and low growth have wiped out the £9.9bn buffer Reeves had against her rules at the autumn Budget last year.

Economic uncertainty, partly related to the war in Ukraine and US President Donald Trump’s trade tariffs, have been blamed for the cost of government borrowing rising across the world.

However, critics have said the UK’s higher borrowing costs are in part down to Labour’s economic policies and the country’s economic outlook.

Long-term government borrowing costs over a period of 10 years continued to rise on Tuesday to hit just below 4.8%.

In her Spring Statement, the chancellor will argue the world has changed, and use the increase in defence spending as an example of a fresh economic approach.

The £2.2bn of funding will be invested in advanced technologies, including new energy weapons on Royal Navy ships.

It will also be used to provide better homes for military families by refurbishing the defence estate.

The investment will also help fund upgrades to infrastructure at Naval Base Portsmouth, enhancing its ability to support Royal Navy operations into the future.