A report on Thursday revealed that UK Exchequer Chancellor Rachel Reeves is set to reveal the largest spending cuts since the era of austerity in next week’s spring statement, after ruling out tax hikes as a solution to her budget deficit.

The chancellor will inform MPs on Wednesday that she plans to reduce budgets by billions of pounds more than originally anticipated, potentially resulting in cuts of up to 7% for certain departments over the next four years.

Economists warn that these cuts will negatively impact essential public services, despite Labour’s pledge to reverse years of decline under Conservative leadership. The announcement comes just one week after ministers introduced approximately £5 billion in cuts to benefit payments, with the majority affecting payments to disabled individuals.

Research by the Resolution Foundation think tank indicates that some disabled individuals could lose up to £10,000 annually in benefits by the end of the decade due to the reforms revealed on Tuesday.

Labour MPs are now concerned that the additional spending cuts next week will place even more strain on the UK’s poorest families.

Whitehall's efficiency and cuts

One Whitehall source said, “The government has been clear that departments will have to find more efficiencies. That is why Wes Streeting [the health secretary] has cut NHS England, that is why Liz Kendall [the work and pensions secretary] has made reductions to welfare payments.”

Another said, “I don’t know how much longer we can go on pretending this is not austerity when the reality is we’re making cuts to vital public services such as police and prisons.”

Ben Zaranko, associate director at the Institute for Fiscal Studies (IFS), 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."

“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," adding, “It is difficult to see how this could be delivered without some adverse impacts on public services and those who rely on them.”

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Treasury officials assert that last year’s budget addressed many of Labour MPs' priorities, including significant tax hikes and increased borrowing to support an additional £70bn in annual spending.

The Chancellor's statement next week was initially planned as a straightforward update to the official economic forecasts from the Office for Budget Responsibility (OBR).

However, the UK economy has faced challenges since the previous budget, with rising borrowing costs and slower-than-expected growth. Labour blames global instability for the economic downturn, while the Conservatives argue that the problems stem from the large tax increase on businesses introduced by Reeves last November.

As a result of this deteriorating economic situation, the Chancellor is now seeking additional funds to meet her fiscal targets.

The OBR will deliver its final forecasts on Friday, including an evaluation of whether the Chancellor is on track to meet her goals of a balanced budget and reducing debt by 2029-30.

Cabinet concerns and project cuts

Government sources told The Guardian that Reeves will not introduce any tax increases next week, despite Conservative claims of a stealth income tax hike through freezing thresholds. She hasn't ruled out such a move later if the economy continues to struggle.

That said, officials have not denied reports that Whitehall budgets may increase by just 1.1% annually after 2025-26, instead of the 1.3% previously planned. However, much of this increase will go toward sectors like NHS, schools, and defense, leaving other departments facing cuts of 1.9% annually or 7% over the remaining parliamentary term.

Ministers argue these cuts don't equate to austerity, as they would be smaller than those imposed by former Chancellor George Osborne. Economists, however, note that these cuts come when public services are already under pressure, unlike in 2010 when budgets had been growing above inflation.

The possibility of additional spending cuts is already raising concerns among cabinet ministers. Several, including Ed Miliband (energy secretary), Yvette Cooper (home secretary), Angela Rayner (deputy prime minister), and Shabana Mahmood (justice secretary), expressed their worries last week during what was described as the most "tense" cabinet meeting of this government.

A Treasury source said, “Last year’s budget delivered £40bn of additional cash into our public service, including the largest real-terms growth in day-to-day NHS spending outside of Covid since 2010. On top of that, we unlocked more than £100bn of investment into our schools, hospitals, and national infrastructure.

“The Tories would have let our public services collapse: we are taking action to rebuild them.”

As part of this process, departments have been instructed to prepare for cuts of up to 20% of their day-to-day spending. According to the report, the situation is so severe that some departments are planning reductions to projects recently approved by the government.