(Bloomberg) -- UK Chancellor of the Exchequer Rachel Reeves announced a package of politically divisive cuts to welfare and government spending to fill a hole in the country’s finances after this year’s growth forecast was cut in half.
The Labour government was forced to turn to cuts as weak growth and rising borrowing costs had put Reeves on course to break a budget rule that she uses to reassure the markets of her fiscal prudence. The chancellor had ruled out further tax rises after £40 billion ($51.5 billion) of extra levies in October’s budget infuriated British businesses.
On Wednesday, Reeves’ midyear economic update to fellow lawmakers detailed a £14 billion package of measures to put her on a path to meet her fiscal rules; £8.4 billion will come from welfare and day-to-day spending cuts, an extra £3.4 billion largely consists of higher revenues from the government’s planning reforms, and £2.2 billion from more efficient tax collection.
The figures are produced by the UK’s Office for Budget Responsibility, which also said the country’s economy is only set to grow 1% this year, down from its previous forecast of 2%. While the downgrade had been widely anticipated, the official fiscal watchdog’s projections forced Reeves to make the cuts now.
Debt markets seemed to welcome the emphasis on fiscal responsibility. Gilts rallied as the government announced a smaller-than-expected slate of bond sales for the upcoming fiscal year, with issuance skewed away from longer-dated securities. Yields on 30-year debt fell as much as 9 basis points to 5.28%. The UK plans to sell £299 billion of bonds, less than the £302 billion estimated in a Bloomberg survey of market participants, but still one of its biggest issuance programs on record.
GDP has barely grown since Labour won a landslide election victory last summer, with opposition parties accusing Reeves of talking down the economy before destroying confidence with the October budget’s tax hikes.
What the British people know is that this is a consequence of her choices,” said Mel Stride, the Conservatives’ Treasury spokesman. “She is the architect of her own misfortune.”
Reeves said the world has changed and pointed to international factors that are weighing on growth. US President Donald Trump has upended the global trade system with widespread tariffs, while European governments are having to divert billions toward defense spending as the White House reduces its support for the continent against Russian aggression.
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