LONDON (Reuters) – British finance minister Rachel Reeves’ headroom for meeting her budget rules has probably turned into a 4.4 billion-pound ($5.7 billion) deficit, requiring tough measures next week to get her back on track, a think tank said on Monday.
The Resolution Foundation called on Reeves to tread carefully with any reductions to welfare spending – which are expected to feature in her budget update speech on March 26 – and to consider tax increases instead.
“The UK’s economic outlook has declined markedly since the budget last autumn,” James Smith, research director at the Resolution Foundation, said.
“Weaker growth and higher interest rate expectations look set to turn the UK’s projected current surplus of 10 billion pounds into a deficit of around 5 billion pounds.”
Britain’s budget watchdog, the Office for Budget Responsibility, is expected to cut its 2.0% economic growth forecast for 2025 sharply. The Bank of England last month slashed its projection to 0.75% and the Resolution Foundation predicted a similar figure.
The public finances have also been strained by higher-than-expected borrowing costs in global financial markets driven largely by the economic policies of U.S. President Donald Trump.
Reeves should act decisively to meet her fiscal rules – which include a target of balancing day-to-day public spending with tax revenues by 2030 – but poorer households should not bear the brunt, Smith said.
“With Britain’s fiscal pressures more likely to intensify rather than fade away, continuing to rule out tax rises is going to make future budgets even more challenging to deliver,” he said.
Reeves and Prime Minister Keir Starmer promised voters in last year’s election they would not raise the rates of income tax, value added tax or a tax on corporate profits.
One option they could take is to extend by two years until 2030 a freeze on the thresholds at which people start paying different levels of income tax, raising billions of pounds.
($1 = 0.7735 pounds)
(Writing by William Schomberg; Editing by Andrew Heavens)
