The British government announced plans for increased military spending and cuts to social benefits, aiming to maintain financial stability in a "more uncertain world." The chancellor of the Exchequer, Rachel Reeves, outlined an additional £2.2 billion ($2.8 billion) for defense in the upcoming fiscal year, alongside previously announced reductions to the benefits system expected to save approximately £5 billion by 2030.
These changes are influenced by global economic disruptions attributed to President Trump’s policies, which have intensified demands on the British government’s budget. In response to the ongoing conflict in Ukraine, Britain, like many European nations, has committed to enhancing defense spending. Concurrently, rising interest rates are increasing government borrowing costs amid fears of a global trade war.
In Parliament, Ms. Reeves emphasized the need for an active government to navigate these changes, stating, “Our task is to secure Britain’s future in a world that is changing before our eyes.”
The British economy experienced a slowdown in the latter half of the previous year, prompting the Office for Budget Responsibility to revise its growth forecast for this year down to 1 percent from 2 percent. Less than five months ago, following the Labour Party's ascension to power, Ms. Reeves had introduced a budget that included significant public spending increases and tax hikes, particularly for employers, with a goal of limiting major announcements to one per year for greater stability.
However, economic uncertainty has surged since the budget's release, largely due to unpredictable U.S. policy changes. The Spring Statement provided Ms. Reeves with a critical opportunity to address these challenges, yet she opted not to make substantial tax changes, focusing instead on spending adjustments, including a slight reduction in public spending starting in 2026.
This budgetary pressure is not unique to Britain; many European nations are also increasing defense budgets in light of wavering U.S. support for Ukraine, despite facing high debt levels and sluggish economic growth. These commitments are expected to have significant fiscal implications as Europe prepares for increased borrowing.
Last month, Prime Minister Keir Starmer announced plans to raise military spending to 2.5 percent of GDP by 2027, which would require an additional £6.4 billion, funded by cuts to overseas aid. Meanwhile, the Trump administration is poised to implement reciprocal tariffs on various countries, with Britain seeking to mitigate the impact through negotiations.
Ms. Reeves faces constraints due to rising interest payments and weak economic growth, with the yield on 10-year government bonds increasing by 0.3 percentage points since October. Debt interest payments for the current fiscal year are projected to reach £105 billion, exceeding the combined expenditures of the defense, justice, and interior ministries.
The Bank of England has been gradually reducing interest rates in response to persistent inflation risks. Recent data indicated a slowdown in Britain’s annual inflation rate to 2.8 percent in February, attributed to lower clothing prices, although inflation is expected to rise again throughout the year.
Ms. Reeves has committed to strict fiscal rules, including a pledge not to borrow for day-to-day spending by the decade's end and to ensure national debt is decreasing by then. She aims to rebuild a fiscal buffer to reassure foreign investors, who may react negatively to signs of fiscal irresponsibility, as seen during Liz Truss’s brief premiership in late 2022.
She remarked, “The British people have seen what happens when a government borrows beyond its means,” asserting that her fiscal rules are “nonnegotiable.” The Office for Budget Responsibility confirmed that the planned welfare cuts, measures to combat tax evasion, and changes to the planning system would allow the government to maintain a buffer in accordance with its fiscal guidelines.