Chancellor Rachel Reeves faces a critical test on Monday when the Office for Budget Responsibility (OBR) delivers its verdict on her autumn budget. After weeks of speculation about a potential £30bn fiscal gap, the chancellor hopes to reassure markets while balancing tax rises and spending cuts.
Gilt markets have rallied recently, lowering government borrowing costs, partly due to falling US rates and Reeves' commitment to fiscal discipline. However, bond investors are pressing for welfare cuts as a sign of budget restraint, with Barclays analysts calling spending reform a 'totemic issue'. Some warn that tax hikes could stifle growth, locking the UK in a low-growth, high-debt cycle.
But economist Richard Partington argues the City's focus on welfare cuts is 'simplistic and misplaced'. While total welfare spending is rising in cash terms—from £300bn to £370bn by decade's end—this reflects an ageing, unwell population, not profligacy. Pensioners account for 13.1 million of 24 million recipients, and working-age claimants often hold jobs.
Partington notes that welfare spending as a share of GDP is projected to remain flat, contrary to claims of unsustainability. Cutting welfare, he says, could worsen Britain's trajectory, especially as public services crumble and the economy underperforms. Reeves must tread carefully to avoid a bond market backlash while not sacrificing growth or social support.
