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Whitehall departments are bracing for tougher spending deals this summer as the Treasury seeks savings after a jump in borrowing costs.
Officials have warned of “really tough choices” in the upcoming spending overhaul – with some departments warning that tougher spending will be difficult to sustain given the cuts of recent years.
“We already have to think about how we can do what we plan to do with even less,” said one Interior Ministry official. “We are concerned.”
The official said comprehensive work on the spending review strategy had not yet begun, but there was growing concern within the department that their spending settlement would be reduced.
There are fears that “we will have to look at how we can spend money more effectively or work with partners to see how we can make our money go further”, they added.
They added, however, that Downing Street had admitted the Home Office had been given a particularly “tough deal” in the autumn budget – with a 3 per cent annual spending cut – giving hope they could be spared some of the pain down the line at the next spending review.
An official in the education department also said that rising gold coin yields – which reduce the government’s fiscal space – raised the prospect of more spending restraint in the coming months.
Another aide said he felt markets were “testing” the Labor administration, adding that the government would need to show it is continuing with spending-cutting plans to convince investors it can be trusted on the economy.
“There are going to be really tough choices in the spending review in a few months,” the person added.
The jitters followed a surge in UK bullion yields that some estimates have erased the chancellor’s leeway against the Treasury’s self-imposed fiscal rules.
Isabel Stockton, an economist at the Institute for Fiscal Studies, warned that recent increases in borrowing costs could easily erode most of the “razor-thin margins” on the UK’s fiscal rules if they persist.
The government sought to calm nerves in financial markets on Thursday as Darren Jones, chief secretary to the Treasury, insisted it would not break its fiscal rules and that there was still healthy demand among investors for UK government debt.
During Thursday, the yield on the 10-year gold rose as high as 4.93 percent, the highest since 2008, before falling to 4.81 percent. The pound fell as much as 1 percent against the dollar to its lowest level in more than a year.
Higher bond yields would affect the Office for Budget Responsibility’s estimates of the government’s future debt interest bills, which already exceed £100 billion a year. The OBR is due to release the forecast on March 26, which will be followed by a statement to Parliament from Chancellor Rachel Reeves.
Reeves was forecast to meet its key current rule, which excludes borrowing for investment, by a slim margin of £9.9bn according to estimates included in the October Budget. Analysts now believe that room for growth has disappeared due to market movements — even before any changes in growth and inflation forecasts.
Jones told the Commons that the Treasury was working on a multi-year spending review due this summer based on the assumptions set out in October’s budget. OBR’s forecasts would have an impact on discussions with ministers.
Additional reporting by Ian Smith in London
