Markets to Welcome UK Welfare Budget Cuts

Picture by Kirsty O’Connor / Treasury

Financial markets will welcome a decision by the government to cut spending on welfare, say analysts.

Welfare budget and departmental spending cuts now look certain to be announced by the Chancellor of the Exchequer.

Rachel Reeves is set to announce the moves in three weeks, when she presents the Office for Budget Responsibility's Spring Forecast.

The most significant development that has occurred since Reeves announced the Autumn budget is the spike in UK borrowing costs, which have eaten at least £10BN of the headroom she had at the time.

"The continued sell-off in gilts is making life a bit harder for Rachel Reeves, who is reportedly going back and forth with the OBR on trying to keep the UK fiscal situation on a sustainable footing," says a note from TD Securities.

The OBR is anticipated to slash growth forecasts, meaning its borrowing forecasts will be revised higher.

Press reports citing Treasury sources say a commitment to the fiscal rules hasn't waned so a corrective policy response is needed to restore headroom, with savings set to come from a combination of welfare payments and departmental budgets.

"Given the government has already delivered significant tax hikes in the Autumn Budget, the government will now need to find savings to from a combination of welfare payments and departmental budgets," says Gemma Hanson, at Icon Offices, a companies formation services provider.

It is likely the split between department budget cuts will come later at June’s Spending Review.

"News that the government is lining up welfare cuts ahead of her March 26 Spring Statement was likely very deliberately timed to ensure that the event itself would create a minimum of market reaction," says Jane Foley, Senior FX Strategist at Rabobank.

She says that should the Labour government can win the support of its own MPs for welfare reform, "the market is likely to welcome some fiscal consolidation from the UK."

The OBR estimates that without reform, the UK’s total spending on benefits will rise by more than 25% by 2030.
https://obr.uk/docs/dlm_uploads/FRS-2024-slides.pdf

An ageing population suggests a rise in pension costs, but working-age sickness-related benefits are also expected to increase significantly.

"The government’s response will be aimed at reforms which facilitates the return to work for the latter group. Progress towards reform will be supportive for UK assets and GBP," says Foley.