Rachel Reeves is on course to tighten Whitehall public service budgets further than expected in the spending review because of the worsening economic outlook, Sky News can reveal.
This will pit the chancellor against some ministers who already claim she is sacrificing the manifesto promises they are expected to deliver – which will no longer be possible on tight budgets – so that she can fulfil her promises.
The chancellor committed in the budget to pay for day to day government spending through taxation rather than borrowing, something that has not been achieved for decades.
In the October budget she left herself just £9.9bn of leeway, out of a total bill for public spending that tops £1trn.
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Worsening economic conditions – including borrowing costs reaching their highest levels since 1998 – mean that the buffer could now be as little as £1bn and could now be eroded altogether.
Sky News understands the Treasury is braced for the possibility that on the spring statement on 26 March, the Office for Budget Responsibility judges she is in breach of her fiscal rule, and would take immediate action to avert this.
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We understand she will stick to her borrowing promises – the fiscal rules announced in the October budget. The Treasury has also committed that there will be no tax changes in the spring statement on 26 March.
In this event, Ms Reeves would be left with no choice other than to shrink public spending budgets further, as well as look for additional, potentially politically unpopular cuts to the welfare budget.
In the budget, Ms Reeves allocated a more generous 4.3% spending uplift in 2024-5 and more modest 2.6% in 2025-6.
But after that she has allocated just 1.3% from 2026 to 2029, which is lower than any point during the Tony Blair and Gordon Brown governments, or any point under Boris Johnson.
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Worsening economic conditions would mean Ms Reeves then has to squeeze budgets further, offering even less than 1.3% a year after 2026, which will likely put herself on a collision course with departments like the Home Office, justice, housing, transport and the environment.
The 1.3% uplift must already account for increases in defence spending to put the UK on course to reach 2.5% of GDP for defence, meaning less for the rest of Whitehall, and any further shrinkage of the budget is likely to be greeted with horror by some cabinet teams.
