Chancellor Rachel Reeves will have to thread a needle, as the United Kingdom finds itself in exceedingly tight fiscal circumstances. Since the Spring Statement, the government has had a £9.9 billion buffer on its main fiscal target. To get to break even with the fiscal rules as they are at the moment, the Chancellor will need to find an additional £10 to £15 billion. Today, economic headwinds have never been a bigger threat to deepening this crisis, with a predicted shortfall of £4 billion looming.
A new report published by the TUC finds that the UK’s productivity is getting worse. To add insult to injury, since 2022, output per hour worked has declined by a full percentage point. This downturn is bad news for a challenging fiscal situation. Equally important, it sets the course for the nation’s long-term economic recovery and growth trajectory.
The Looming Shortfall and Economic Constraints
Against this backdrop of financial pressures, Reeves will have to make some very tough decisions from her nearest Spending Review on 11 June. With government spending over £1.5 trillion every year, the current headroom of £9.9 billion looks quite insignificant by comparison. The consequences of this damage to our fiscal health run deep—including on many sectors and departments that depend on government funding.
Raising employer National Insurance contributions by at least one percentage point can help ease these pressures. This combination of reforms has the potential to raise around £6 billion. That would be a much-needed infusion of cash, but it would welcome the ire of an already cash-strapped business community facing a difficult economic landscape. Extending the freeze on certain thresholds until the end of the decade could bring in an estimated £9 billion more to public finances. This new policy presents a promising opportunity to begin to make up at least some of the shortfall.
Despite these measures, achieving the fiscal target by the end of the decade could necessitate an extra £17 billion annually. The large jump in the challenge to be met is sobering, especially when multi-billion tax hikes seem imminent later this year. The Chancellor’s upcoming decisions will be closely scrutinized, as they will have far-reaching effects on public services and economic stability.
Projected Growth and Fiscal Targets
The UK’s economic prospects continue to be bleak. Growth projections have been adjusted down to just 1% for both this year and next. The Office for Budget Responsibility (OBR) is expecting a higher, rosier growth figure of 1.9% for 2026. Nevertheless, many analysts are cautious about whether we can actually reach such targets, given the state of the economy.
As Reeves looks toward her first Spending Review, she needs to square these ambitious growth figures with some very difficult fiscal realities. The government has to both stimulate growth and assume responsibility for deficits. This kind of targeted approach will be key to restoring fiscal balance without endangering the delivery of vital government services.
Beyond general economic malaise, some specific policy decisions are of great concern. For example, scrapping the two-child benefit cap would have a reported additional annual cost of £3.5 billion. While these measures would help mitigate the cost of living crisis facing families now, they would increase an already overstretched budget.
Implications for Public Services
The fiscal straightjacket is set to profoundly affect the UK’s public services. Departmental budgets would be limited to a mere 1% year-on-year growth for the next three fiscal years. Importantly, this growth will happen in inflation-adjusted terms. This modest increase is unlikely even to keep pace with inflation. As demand for their services increases, hard choices about how to allocate that available funding are coming due.
As federal departments expect cuts or at least flat budgets, the future of public services is in question. The Chancellor will need to tread a careful line of fiscal restraint and investments in areas such as healthcare and education. This balance is essential for upholding the public’s trust and delivering excellent service.