UK Chancellor Rachel Reeves announced £14 billion of annual spending cuts today to restore the government’s headroom against its fiscal rules.

The OBR halved its 2025 growth estimate from 2% of GDP to 1% but increased its estimates from 2026 onwards on expectations of lower gas prices, easing monetary policy, and a return of productivity growth in line with historic trends.

The combination of these changes to the economic environment and higher gilt yields would have left the government breaching its balanced current budget rule by £4.1 billion were it not for the measures announced today. 

The cuts to the welfare system are unlikely to be popular with Labour backbenchers. And the plans for day-to-day spending pencilled in from 2027 are unlikely to be deliverable given material and political constraints. 

So, should fiscal headroom erode again, Reeves has little room for manoeuvre. Indeed, the likelihood of further fiscal deterioration is high. The government has restored just £9.9 billion of headroom, which growth disappointments and adverse market moves could easily wipe out before the budget in the autumn. 

We continue to think the vulnerability of the fiscal position to shocks and demands on the public finances mean higher taxes are likely, while changes to the current fiscal rules are also possible. 

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