Umair
The British government on Wednesday laid out plans for higher military spending and cuts to social benefits, as it sought to keep the nation’s finances on track in what it called a “more uncertain world.”
Rachel Reeves, the chancellor of the Exchequer, said there would be an extra 2.2 billion pounds ($2.8 billion) for defense in the fiscal year that begins next month. And she reiterated recently announced reductions to the benefits system that were expected to save about £5 billion by 2030.
The changes come as President Trump’s economic policies have disrupted the global economy, putting more demands on the British government’s already stretched budget. Like many other European countries, Britain has pledged to spend more on defense to support Ukraine against Russia. At the same time, the threat of a global trade war is lurking and interest rates have increased, pushing up government borrowing costs.
“Our task is to secure Britain’s future in a world that is changing before our eyes,” Ms. Reeves said in Parliament on Wednesday.
“The job of a responsible government is not simply to watch this change,” she added. “This moment demands an active government.”
Adding to the hurdles, the British economy slowed in the second half of last year, and the Office for Budget Responsibility, an independent watchdog, halved its forecast for growth this year to 1 percent from 2 percent.
Less than five months ago, shortly after the Labour Party came into power, Ms. Reeves presented her first budget, announcing a substantial increase in short-term public spending, a commitment to increase investment and a sharp rise in taxes, particularly for employers. Ms. Reeves had said she wanted to reduce the number of big announcements on tax and spending, preferably down to just one per year, to provide more stability for households and businesses.
But since the budget was released in October, there has been a surge in economic uncertainty, much of it derived from sweeping and unpredictable policy changes in the United States since Mr. Trump’s election. That has made Wednesday’s budget update, known as the Spring Statement, more consequential because it was the first big opportunity for Ms. Reeves to respond to the economic upheaval.
She resisted the pressure to substantially change course. Ms. Reeves did not announce any meaningful changes to taxes, but the measures were instead focused on spending plans. That included a slight reduction in public spending starting in 2026.
Pressure on the budget is not unique to Britain. In response to wavering U.S. commitment for Ukraine, most European countries are planning to spend more on defense, but they are already facing high debt levels and a lackluster economic growth outlook. Still, these pledges are set to have far-reaching fiscal consequences as Europe prepares to borrow much more.
Last month, Britain’s prime minister, Keir Starmer, said military spending would rise to 2.5 percent of gross domestic product by 2027, an extra £6.4 billion. Overseas aid would be cut to pay for it.
Next week, the Trump administration is set to impose what it is calling reciprocal tariffs on many countries. Britain is hoping to avoid the brunt of these tariffs and is in negotiations with the United States. Trade policy uncertainty has hampered business investment around the world and caused volatility in financial markets.
Ms. Reeves has had little room to maneuver thanks, in part, to rising interest rate payments and weak economic growth. The yield on 10-year government bonds is about 0.3 percentage points higher than it was in October. Debt interest payments were £105 billion for the fiscal year that ends this month, more than is spent by the defense department, justice ministry and the interior ministry combined, Ms. Reeves said.
And the Bank of England has been cutting rates slowly because of lingering inflation risks. On Wednesday, data showed that Britain’s annual inflation rate slowed to 2.8 percent in February because of lower clothing prices, a temporary respite before inflation is expected to rise again through most of this year.
Ms. Reeves has promised to stick to strict fiscal rules, including a commitment to not borrow for day-to-spending by the end of the decade and for a measure of national debt to be falling by then, too. And so, she has sought to rebuild a fiscal buffer against these rules to reassure foreign investors, who can be punishing at any signs of fiscal irresponsibility and send borrowing costs soaring, like during Liz Truss’s premiership in late 2022.
“The British people have seen what happens when a government borrows beyond its means,” Ms. Reeves said, adding that her fiscal rules were “nonnegotiable.”
The Office for Budget Responsibility confirmed that cuts to welfare and overseas aid, measures to crackdown on tax evasion, and changes to the planning system to make it easier to build homes and infrastructure meant that the government would still have a buffer in line with its fiscal rules.
