Rachel Reeves will announce the biggest spending cuts since austerity at next week’s spring statement after ruling out tax rises as a way to close her budget deficit.
The chancellor will tell MPs next Wednesday that she intends to cut Whitehall budgets by billions of pounds more than previously expected in a move which could mean reductions of as much as 7% for certain departments over the next four years.
Economists say the cuts will harm key public services, despite Labour’s promises to undo years of decline under the Conservatives. They will be announced a week after ministers unveiled about £5bn worth of cuts to benefit payments, most of which are going from payments to disabled people.
Analysis by the Resolution Foundation thinktank has found that some disabled people could lose nearly £10,000 a year in benefits by the end of the decade under the reforms announced on Tuesday.
Labour MPs now worry that next week’s additional spending cuts will put further pressure on Britain’s poorest families.
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.
“It is difficult to see how this could be delivered without some adverse impacts on public services and those who rely on them.”
Treasury officials say last year’s budget fulfilled many of the wishes of Labour MPs, with big rises in taxes and borrowing to pay for £70bn worth of additional spending a year.
The chancellor’s statement next week was originally supposed to involve a straightforward update to the official economic forecasts from the Office for Budget Responsibility (OBR).
The British economy has struggled since last year’s budget however, with borrowing costs having risen and growth proving more sluggish than expected. Labour has blamed global turmoil for the economic malaise, but the Conservatives say it is a result of the major tax hike Reeves imposed on businesses last November.
The worsening outlook has left the chancellor looking for additional money to avoid missing her fiscal targets.
The OBR will hand her its final forecasts on Friday, including its assessment of how close she is to breaking her promises to have a balanced day-to-day budget by 2029-30 and to have debt falling by the same time.
Government sources have told the Guardian Reeves will not announce any tax rises next week, despite Conservative claims that she is planning to introduce a stealth income tax raid by freezing the threshold where people start paying it. The chancellor has not ruled out making such a move later in the year, should the economy continue to struggle.
Officials are not denying reports that they could seek to increase Whitehall budgets by an average of 1.1% a year after 2025-26, rather than the 1.3% announced last year.
Given that much of this money will be taken up by expected rises to budgets in areas such as the NHS, schools and defence, the IFS calculates this would mean other departments – such as justice, the Home Office and local government – falling by about 1.9% a year, or 7% over the rest of the parliament.
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Ministers argue this would not amount to austerity because the annual cuts would be about half as steep as those overseen by the former chancellor George Osborne from 2010 onwards.
Economists, however, point out that they will be enforced when public services are already stretched, unlike in 2010 when they had enjoyed years of budgets rising above inflation.
The prospect of further spending cuts is already causing alarm among cabinet ministers. Several – including Ed Miliband, the energy secretary, Yvette Cooper, the home secretary, Angela Rayner, the deputy prime minister, and Shabana Mahmood, the justice secretary – voiced their concern about the cuts last week during what has been 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.”
Reeves will on Wednesday announce the average level of spending across Whitehall over the next few years, but will only reveal what it means for individual departments at the spending review in June.
As part of the spending review process, departments have been asked to model cuts of up to 20% of day-to-day spending.
The scenario is so severe that departments are having to plan for cuts to projects which have recently been announced by this government.
The Department for Transport, for example, has submitted plans for cuts to the proposed rail line between Oxford and Cambridge, which Reeves herself confirmed funding for just two months ago. Officials have also suggested using private investment to build the long-delayed Lower Thames Crossing – a planned £9bn road tunnel linking Essex and Kent.
A spokesperson for the transport department said: “This is speculation. East West Rail is already well underway with the infrastructure now in place on the first phase of the line for services between Oxford and Milton Keynes.”
The cuts Reeves will unveil next week are likely to cause further unease among Labour MPs who are already reeling from recent cuts to international aid and welfare.
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.”