Treasury insists on no spring Budget despite fears of fiscal rule breach

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Rachel Reeves will not hold an emergency tax-raising budget next spring if low growth or other setbacks blow a hole in her fiscal plans, the Treasury has insisted, pointing to a spending squeeze if action is needed.

Disappointing growth data last week showed the UK the economy has shrunk for the second consecutive month in October, raising the risk that official forecasts in the spring will show the chancellor breaking his fiscal rules.

Reeves is currently set to stick to his key fiscal rule of tax-only day-to-day spending until 2029-30 by a margin of £9.9bn, leaving his plans vulnerable to falling growth expectations or rising borrowing costs trillion pounds of annual government spending, the margin is slim.

The Office for Budget Responsibility will make new predictions in the spring about whether the chancellor will live up to her mandate.

The Treasury said Reeves was sticking to “one major fiscal event each year” – the autumn budget, which would be when the chancellor would announce any changes to taxes and borrowing, proposing spending cuts in the spring if fiscal tightening is required.

“We are not going to predict the forecast, but no one should question the Chancellor’s commitment to economic stability and sound public finances,” the Treasury said.

“The Chancellor has been clear that there will be no repeat of October’s Budget and is now focused on growing the economy and eliminating wasteful public spending through a second round of spending reviews.”

Treasury officials pointed to comments by Reeves to the Daily Mail this month in which he ruled out further tax increases next autumn.

“I’m not going to return in the spring. That’s what the previous government did. They made a budget and then came back six months later,” Reeves told the Daily Mail.

The chancellor also told a CBA business conference last month that he was “not coming back with more borrowing or more taxes”, a comment widely taken to rule out such measures for the rest of parliament. Reeves and No 10 later insisted he would does not tie its hands for future budgets.

Official figures showed GDP fell 0.1 percent in October, following a similar contraction the previous month, raising concerns that disappointing growth could put public finances under fresh pressure.

Ruth Gregory, at Capital Economics, said she expected the level of GDP to be 0.7 percent lower by the end of this year than forecast in the October budget.

If this weakness persists in future years, it could reduce the chancellor’s headroom by up to £13 billion, wiping out that headroom,” he said.

However, he stressed that the OBR was likely to judge the current economic weakness to be a temporary problem, limiting the damage to the chancellor’s fiscal space.

Reeves has said he wants to end the Treasury’s recent practice of preparing two major financial events a year, and wants his officials to spend the next six months focusing instead on stimulus measures.

However, the chancellor is expected to issue an economic statement in line with the OBR’s forecasts, Treasury officials are quoted as saying that Spring announcements made by former Conservative chancellor Philip Hammond.

Hammond, like many of his predecessors, wanted to hold just one budget a year, but recent crises including the financial crash, Brexit and Covid often push chancellors to hold two such events a year.