UK growth forecast set for major downgrade as chancellor faces difficult spring statement

The chancellor's update on the economy next week is not going to be an emergency budget in its truest sense. But it will be a moment when the sirens flash red.

It's not an emergency budget because the chancellor, as our listeners will know from our interview with Rachel Reeves on Electoral Dysfunction a couple of weeks ago, is not going to make tax changes (such a move would tip it into budget territory because it would turn the spring statement into a major fiscal event).

But it looks set to be a red siren moment for a chancellor. Having staked her reputation on growing the economy and no return to austerity, she is going to have to announce a downgrade to growth forecasts and could also unveil the biggest spending squeeze on Whitehall in years.

The welfare cuts this week were just the starter - the opposition are going to have a field day.

Watch out in the next few days for a "re-education" as the Treasury tries to frame the arguments Reeves will get in at the despatch box on Wednesday.

You'll hear about how the "world has changed", with global uncertainly knocking growth and forcing countries to invest more in defence.

This is all part of the chancellor seeking to distance sluggish growth from her own budget decisions last October (the Conservatives will shout back jobs tax - their rebranding of the Reeves' £25bn hike in employers' national insurance contributions).

You will also be hearing more about the need to go "further and faster" on the economy (the bonfire of quangos, planning rules, regulations and drive for 'efficiency savings').

But whatever arguments she makes ahead of time won't dent the sharp inhalation of breath as growth is downgraded and the chancellor outlines what's likely to be billions in cuts to the departmental budgets in an effort to plug the black hole in the public finances that has emerged from slower growth and rising debt repayments.

Economists expect the deteriorating outlook to eat up the £9.9bn of headroom she had in order to meet her own fiscal rules in the October budget.

The Resolution Foundation think-tank estimates that the current account balance has shifted from that £9.9bn surplus to a deficit of around £4.4bn. Many Labour MPs think Reeves should just loosen her fiscal rules (she has legislated that day-to-day spending must be funded from tax receipts, not debt, by 2029/30), but she told me on our Electoral Dysfunction podcast that is something she will not do.

Neither, I hear, is she prepared to just let the public finances sit in the red. But getting back to black is going to involve a massive spending squeeze.

So watch for reductions in Whitehall departmental budgets later in the parliament.

The government has already earmarked £5bn in savings from the benefits bill by 2029/30 and could whittle back projected rises in departmental spending towards the back end of parliament.

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Departmental spending is set to rise by an average of 1.3% from 2026-27 onwards. If the chancellor reduces that, she could save billions. But the headlines will scream cuts, especially for those departments which don't have protected budgets and which could face real terms reductions.

It's going to be difficult and the government is braced for cries of austerity 2.0, which is frustrating officials who are quick to point out that the government has poured billions more into public spending after executing the biggest tax and spend budget in a generation.

"This is not a return to austerity, which was about real terms cuts," said one figure. "We will be finding savings and squeezing spending but the overall level of spending will still be going up."

But it is tense. As she looks for savings, the chancellor has asked cabinet ministers to identify 5% efficiency savings from their departments and also identify 20% of the lowest priority spending. In private, ministers are protesting about cuts.

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Labour peer Harriet Harman told the Electoral Dysfunction podcast that identifying such big levels of savings is going to cause consternation.

"As somebody who was told to do 2% and felt even that was incredibly difficult, then I should imagine that it is causing consternation.

"It is a very, very difficult exercise. But, you know, at the end of the day, we're in difficult circumstances.

"We've made a promise to the electorate about how are we going to run the economy, and that's what we're going to do.

"And Labour MPs, I think, you know, are very resolved on this. They know the situation's difficult. They know the government has got a set of principles that they're applying to it, and they'll be supportive of the government on this.

"So one thing we have got is political stability on this. There won't be any, you know, screeching handbrake U-turns. There won't be massive revolts and there won't be cabinet splits either."

The government hopes protest will be dialled down as it dials up talk about 'reform' and how the government can rewire Whitehall in a way that money is trained on the frontline and services can be maintained even as budgets are whittled back.

The biggest symbol of that so far being the prime minister's announcement last week that he was abolishing NHS England and folding the oversight of the NHS back into the Health department - which the government says could save up to £500m a year.

But even if Harriet Harman is right on the would-be rebels and ministers have their arguments honed, a major downgrade of growth forecasts and a spending squeeze from a government that told voters it would be doing the exact opposite in the run-up to the election is set to be a very difficult day indeed.

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(c) Sky News 2025: UK growth forecast set for major downgrade as chancellor faces difficult spring statement