Rachel Reeves has announced a £14bn package to repair the UK public finances after weak economic growth and high borrowing costs blew a hole in the country’s fiscal position just five months after her first Budget.

The chancellor delivered a Spring Statement in which growth forecasts for 2025 were halved from 2 per cent to 1 per cent, as she told MPs that she had to take account of “a world that is changing before our eyes”.

Most of her statement was dedicated to showing how she would restore the government’s “headroom” — or fiscal room for manoeuvre — from a £4.1bn deficit back to the £9.9bn level set at her October Budget.

Gilt investors gave a tentative welcome to the statement and accompanying debt issuance forecasts, in contrast with the market sell-off sparked by the October Budget.

But the Office for Budget Responsibility, the UK’s fiscal watchdog, said that, even after Wednesday’s changes, she retained only a “very small margin”, with just a third of the average headroom set aside by previous chancellors against their fiscal rules since 2010.

Paul Johnson, director of the Institute for Fiscal Studies, said that Reeves was now “at the mercy of events”, with “months of speculation about what taxes might or might not be increased” at the autumn Budget. “There is a cost, both economic and political, to that uncertainty,” he said.

The chancellor announced neither tax rises nor changes to the fiscal rules, which she said were “non-negotiable” but cautioned that there were “hard yards” ahead.

In one of the biggest surprises of the day, she said that according to OBR calculations, a relaxation of planning rules would boost GDP and tax receipts, reducing borrowing by a further £3.4bn by 2029-30.

The watchdog added that welfare cuts would result in a saving of £4.8bn by that time, while cuts to planned day-to-day departmental spending would save £3.6bn. Tax compliance measures are forecast to raise £2.2bn by 2029-30.

While capital spending is set to increase, this does not affect Reeves’ main fiscal rule, which focuses on day-to-day spending.

According to an impact assessment by the Department for Work and Pensions on Wednesday, about 3.2mn people will lose out financially as a result of the welfare reforms, losing on average £1,720 a year.

About 250,000 people, including 50,000 children, will be pushed into relative poverty, stark facts that have alarmed many Labour MPs, who will be asked to vote for the package at a later date.

Rachael Maskell, Labour MP for York Central, said fiscal responsibility was crucial to prevent interest rates from going up, but this should never be achieved “on the back of millions of people” on low incomes. 

The Spring Statement was the chancellor’s response to a new set of OBR forecasts that estimated her headroom against her key fiscal rule — that current spending must be balanced by tax receipts by 2029-30 — had been wiped out.

Johnson warned Reeves risked “losing the wood for the trees, as policy is seemingly being fine-tuned in pursuit of an arbitrary and highly uncertain measure of ‘fiscal headroom’”.

Reeves did not mention Donald Trump by name, but in effect blamed the US president for some of Britain’s woes, saying the world was becoming “more uncertain” and that trade patterns were becoming “more unstable”.

The OBR highlighted the risks, warning that if a global trade dispute escalated to include a 20 percentage point rise in tariffs between the US and the rest of the world, it would obliterate Reeves’ headroom against her fiscal targets.

But Reeves also came to the House of Commons with some brighter news, noting that although the OBR had halved its growth forecast for 2025, it had upgraded its forecast for future years, running at around 1.75 per cent for the rest of the decade.

The chancellor confirmed that defence spending would increase to 2.5 per cent of GDP.

She is likely to face a bigger test at her autumn Budget, when she could be forced to address long-term pressure on public spending — including defence — and the possible impact of a Trump trade war. Some Labour MPs believe she will be forced to raise taxes.

“We can act quickly and decisively in a more uncertain world,” Reeves said, as she referred to “increasing global uncertainty”. A big package of defence spending was badged as an investment in making Britain a “defence industrial superpower”.

UK borrowing costs dipped following Reeves’ statement, as the government announced debt sales of £304bn for the coming year, slightly less than the £308bn forecast by markets.

Ten-year gilt yields, which move inversely to prices, were down 0.03 percentage points to 4.73 per cent.

The pound was little changed, trading 0.4 per cent lower on the day at $1.289 to the US dollar.

The Spring Statement comes ahead of the implementation next month of a major increase in employer national insurance contributions, announced in Reeves’ Budget in October.

About three-quarters of the cost of measure will be passed on to workers “via lower real wages”, the OBR said on Wednesday, adding that most surveys of business leaders pointed to a substantial reduction in nominal wages.

The national insurance rise is set to raise £23.8bn in the 2025-26 fiscal year, rising to £25.7bn in 2029-30. It comes alongside tax increases that have already been implemented, including the imposition of VAT on private school fees that came into force in January.

The chancellor is also phasing in other tax-raising measures, including capital gains tax and inheritance tax on agricultural and business property.