Chancellor Rachel Reeves is set to prioritise spending cuts in next week’s Spring Statement, delaying potential tax hikes until October.
Despite mounting pressure, government sources suggest she will hold off on announcing tax rises — despite Conservative warnings of a stealth income tax raid through frozen thresholds.
Reeves is grappling with a budget deficit of £15-20billion after the Office for Budget Responsibility downgraded its growth forecasts.
The chancellor has not ruled out making such a move later in the year, should the economy continue to struggle.
While she hasn’t ruled out tax hikes later in the year next week’s Spring Statement will focus on spending cuts.
The full details of these reductions will be outlined in June’s spending review.
Reeves is excepted to announce the biggest spending cuts since austerity at next week’s spring statement, with reductions potentially reaching seven per cent for certain departments over the next four years.
Rachel Reeves has come under increased pressure with financial markets in turmoil
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In her Autumn Budget, Chancellor Rachel Reeves planned a 1.3 per cent increase in departmental spending from 2026-27, but she is now expected to scale this back to around one per cent to help balance the books.
The Institute for Fiscal Studies estimates that cutting this to 1.1 per cent could save £5bn a year by the end of this parliament.
However, unprotected departments — those outside health and defence — are bracing for budget cuts of up to 11 per cent, with some being asked to model reductions of as much as 20 per cent in day-to-day spending.
Meanwhile, speculation over tax hikes is mounting after Sir Keir Starmer dodged questions on whether he would extend the income tax threshold freeze from 2028 to 2030.
During Prime Minister’s Questions, Conservative leader Kemi Badenoch pressed Starmer on whether he would repeat Reeves’ commitment not to extend the threshold freeze.
Starmer did not respond directly, saying Badenoch had “such prescriptive questions that she can’t actually adapt them to the answers that I’m giving”.
The move is described as a “stealth tax” because freezing thresholds means people are dragged into paying higher rates of income tax as their earnings rise.
Reeves had previously announced in her autumn budget that the government would not extend the freeze in income tax thresholds.
A government source did not rule out the move but said any decisions on tax would have to wait until the autumn budget.
The scale of the cuts led to a cabinet revolt last week, when ministers raised concerns that it would hinder their ability to deliver on the government’s priorities.
Those raising concerns included Ed Miliband, the energy secretary; Yvette Cooper, the home secretary; and Shabana Mahmood, the justice secretary.
Angela Rayner, the deputy prime minister, also voiced her concern during what has been described as the most “tense” cabinet meeting of this government.
Reeves has rejected calls by some MPs for her to change her “iron-clad” fiscal rules to balance the books rather than cut public spending.
She reminded ministers of the huge scale of tax rises and public spending in the autumn budget, when she implied that it would not happen again.
Tax rises could come in Autumn
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The Department for Transport has reportedly submitted plans for cuts to the proposed rail line between Oxford and Cambridge, which Reeves herself confirmed funding for just two months ago.
Economists say the cuts will harm key public services, despite Labour’s promises to undo years of decline under the Conservatives.
Ben Zaranko, associate director at the Institute for Fiscal Studies, said: “The government will be hoping that the short-term cash injection provided last year, and efficiency improvements as public services continue to recover from the pandemic, will be enough to deliver service improvements even if money is tight.”
He added: “But we’re in a very different world to 2010 and, even though the pace of cuts would be substantially slower than in the peak austerity years, it would still represent the steepest cuts since 2019.”
Labour MPs are increasingly concerned about the impact on Britain’s poorest families. One MP said: “Increasingly I’m trying to figure out what we’re doing that the Tories wouldn’t be if they were in power.”
