UK government plugs hole in finances as 2025 growth forecast is halved to 1%

Reeves, whose official title is Chancellor of the Exchequer, has partly sought to fill that hole with measures to rein in tax avoidance and tax evasion, and by lowering the day-to-day costs of running government.

Far more controversial are planned welfare cuts that have caused widespread unease within the governing left-of-center Labour Party. While a government-backed assessment found that the changes to disability benefits could push 250,000 people, including 50,000 children, into poverty, Reeves said that didn't account for how the changes will move people into work and away from welfare.

“That’s the best way to lift families out of poverty,” she said.

Longer-term, the OBR forecasts were a bit more positive for the government with housing starts on course to meet a four-decade high following widespread planning reforms. Reeves was able to point to higher growth forecasts for the years ahead which, if they prove accurate, should ease the pressure on her to lower spending or increase taxes in the remaining years of this Parliament, which can run until the middle of 2029.

However, the agency said the outlook looks “risky,” particularly on the international front. It highlighted risks posed by the prospect of a global trade war in light of the tariff policies being enacted by the Trump administration.

Paul Johnson, director of the well-respected Institute for Fiscal Studies, said another growth downgrade in the fall ahead of the annual budget is “entirely possible” and that Reeves has left herself at the “mercy of events” given her iron-clad adherence to her fiscal rules.

“What the Chancellor has all but guaranteed is another six months of damaging speculation and uncertainty over tax policy,” he said.

Reflecting geopolitical turbulence caused by the return of U.S. President Donald Trump, Reeves told lawmakers that a “more insecure world” requires a greater focus on national security.

As a result, she confirmed a 2.2 billion-pound ($2.9 billion) increase in defense spending, which Prime Minister Keir Starmer has said is the biggest increase since the end of the Cold War.

“This additional investment is not just about increasing our national security but increasing our economic security, too,” Reeves said. “As defense spending rises, I want the whole country to feel the benefits.”

The British economy, the sixth-largest in the world, has underperformed its long-run average since the global financial crisis of 2008-9, and the new Labour government has made boosting growth its number one economic policy.

Critics say Reeves is partly responsible for gloomy economic news since Labour returned to power in July after 14 years, because she was overly downbeat when taking on her role and has since increased taxes, particularly on businesses.

“She is the architect of her own misfortune,” said Mel Stride, the economy spokesperson for the main opposition Conservative Party.

Reeves received some welcome news Wednesday, with official figures showing that consumer price inflation fell to 2.8% from 3% the previous month. Though still above the Bank of England's 2% target, Reeves will hope that easing price pressures will lead to further interest rate reductions that would lower the government's debt interest payments.