UK (Parliament Politics Magazine) – The Institute for Fiscal Studies urged Chancellor Rachel Reeves to consider welfare cuts and bold budget measures to address a £22bn fiscal shortfall.
As reported by The Guardian, the UK’s leading economists have warned Rachel Reeves to consider billions in welfare cuts in next month’s budget to restore investor confidence and steady the markets.
Following Ms Reeves’s hints at possible spending constraints, the Institute for Fiscal Studies has urged her to act decisively to close a £22bn gap in government finances.
IFS reports on Rachel Reeves’s options for plugging the £22bn gap
The IFS warned Rachel Reeves against “doing the bare minimum” to rebuild a financial buffer, saying she may need to focus on welfare savings and potential tax hikes.
The think tank said options could include scrapping the pensions triple lock, reducing health-related and disability benefits, and limiting growth in spending on special educational needs. These steps could reignite conflict with Labour backbenchers, following a previous U-turn when ministers tried to implement billions in welfare cuts.
The IFS’s latest green budget, released before Ms Reeves’s Commons address, warns that she may need to raise at least £22bn through a combination of tax and spending measures. This would restore the £9.9bn of fiscal headroom that Ms. Reeves retained at the March Spring Statement, in line with her main rule that day-to-day spending be covered by revenues by the end of the parliament.
The Office for Budget Responsibility is likely to deliver a sharp downgrade to the chancellor amid higher borrowing costs and faltering productivity forecasts.
The think tank urged the chancellor to raise more revenue to strengthen the financial buffer and prevent repeated “groundhog day” speculation over the rules.
In a report prepared in collaboration with Barclays, the IFS warned that steps to boost revenue need to be seen as credible, or risk renewed doubts over fiscal rules.
Ben Zaranko, associate director at the IFS, said reforms must focus on improving outcomes for individuals.
He added,
“Chasing specific savings is not a recipe for success.”
What did Moyeen Islam say about welfare and market reactions?
Moyeen Islam, Barclays fixed-income strategist behind the IFS report section, stated,
“Welfare is totemic. It’s totemic for the market because it shows a willingness to do hard things and burn a little bit of political capital … If you can’t do this with a 150 MP majority, or whatever it is, then when will you do this?”
He said,
“There would be an appreciation that she is willing to take hard choices. That to me is credibility bolstering or enhancing.”
Mr Aslam warned that City investors see a risk of Ms Reeves using a “scrabble bag” approach to repairing public finances.
He said,
“[If] you cobble together a hodgepodge of measures and they’re not viewed as deliverable or credible, then you are entering into a more adverse market scenario.”
Commenting on Labour’s reversals on winter fuel payments and disability benefits, Mr Aslam added,
“In the great scheme of a £2.5tn economy, £6bn is not a lot of money. But what £6bn can gain you is an appreciation from the market that you’re willing to take hard decisions. That, to me, is credibility bolstering or enhancing.”
He continued in the report,
“The market’s patience can only be tested so many times before fiscal scepticism morphs into the preconditions needed to see a full gilt funding crisis.”
What did Helen Miller say about fiscal uncertainty?
Helen Miller, IFS director, admitted that spending cuts by themselves would be a “political difficulty.”
She said,
“They tried the disability benefit reforms and didn’t get them through. Labour backbenchers will now be on high alert for anything that looks like just cutting and not reform. And it absolutely needs reform.”
Ms Miller stated the government could win investor confidence by outlining long-term reforms, highlighting the pensions triple lock and motoring taxes as potential measures.
Sir Mel Stride’s views on Rachel Reeves and Keir Starmer
Sir Mel Stride, the shadow chancellor, stated,
“Britain faces serious economic challenges, but instead of confronting them, Rachel Reeves and Keir Starmer are hemmed in by their own MPs and too weak to take the tough decisions the country needs.”
HM Treasury’s stance on fiscal rules and interest rates
An HM Treasury spokesperson stated,
“We won’t comment on speculation. The chancellor’s non-negotiable fiscal rules provide the stability needed to help to keep interest rates low while also prioritising investment to support long-term growth.”
What did Rachel Reeves say about tax rises and spending cuts?
Rachel Reeves signalled she is considering raising taxes and cutting spending. The chancellor told reporters that both tax and spending measures are under consideration.
She said,
“I was really clear during the general election campaign – and we discussed this many times – that I would always make sure the numbers add up.”
Ms Reeves stated,
“Challenges are being thrown our way – whether that is the geopolitical uncertainties, the conflicts around the world, the increased tariffs and barriers to trade. And now this (OBR) review is looking at how productive our economy has been in the past and then projecting that forward.”
The chancellor added,
“Of course, we’re looking at tax and spending as well, but the numbers will always add up with me as chancellor because we saw just three years ago what happens when a government, where the Conservatives, lost control of the public finances: inflation and interest rates went through the roof.”
Key details about the UK’s 2025 Budget
The UK 2025 budget aims to balance finances with tax rises, spending cuts, and key investments. Tax changes may include freezing allowances, limiting pension reliefs, and reviewing property and capital gains taxes.
Social support will expand through free school meals, capped bus fares, and school uniforms. A £13.2bn Warm Homes Plan (2025–2030) will help ease cost-of-living pressures for families.