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Chancellor Rachel Reeves will try to patch up a deep hole in Britain’s public finances this week in a Spring Statement held in the shadow of Donald Trump, as ministers race to secure a deal with the US to avoid punitive tariffs.
Reeves will tell MPs on Wednesday that Britain confronts a “changing world” in which it has to find more money to defend itself. She has warned that “global headwinds such as trade uncertainty” are causing disruption.
The chancellor did not deny that Britain was looking at changing or even axing its digital services tax, a levy opposed by Trump and US tech firms, in a move intended to appease the US president.
Any changes to the levy, which is expected to raise £800mn this year, would worsen Britain’s already strained public finances. But ministers believe it may be a price worth paying to avoid punitive US global tariffs, expected to be announced on April 2.
The prospect of an escalating global trade war will hang over the Spring Statement, when October’s growth forecasts for 2025 from the Office for Budget Responsibility are expected to be cut from 2 per cent to about 1 per cent.
The Financial Times revealed last week that the digital services levy is on the table in talks with the US.
The chancellor, speaking to the BBC on Sunday, said it was “the right thing that companies who operate in the UK pay their taxes in the UK”, but added: “We are in discussion at the moment around a whole range of things relating to tariffs with the US.”
British officials say the UK and US are close to finalising “heads of agreement” on an economic deal that would initially focus on technology co-operation and tariffs.
Britain’s digital services tax, which affects US tech groups including Alphabet, Meta and Amazon, was introduced by the former Conservative government in April 2020 to ensure that global digital businesses paid tax that reflected the value they derived from UK customers.
The flat rate 2 per cent tax is applied to companies that have global revenues in excess of £500mn, and is applied on revenues derived from the UK.
Treasury officials say any deal with Washington would happen too late to feature in Wednesday’s statement but ministers want it in place before April 2, dubbed “world tariff day” in Whitehall.
The chancellor already has big fiscal problems, after slow growth and rising borrowing costs wiped out the £9.9bn of headroom she had against her fiscal rule — which says current spending must be in balance with tax receipts by 2029-30 — at her October Budget.
New OBR forecasts are expected to show Reeves is in the red by about £4bn, according to people familiar with the assessment, leaving her needing to find nearly £15bn to rebuild her current fiscal headroom.
Reeves’ solution will include £5bn in welfare savings announced last week and £2bn from switching spending from overseas aid to a capital-heavy defence budget. A further £1bn is expected to be raised from improving tax compliance.
Most of the remaining gap will be funded by cuts to planned spending by Whitehall departments later in the parliament, a plan which created dissent at a cabinet meeting earlier this month.
Reeves said on Sunday that 10,000 civil servants would lose their jobs as she announced Whitehall cuts intended to save over £2bn by 2029-30, with officials saying privately that “tens of thousands” of posts could go. The civil service had 514,000 full-time equivalent staff in December 2024.
Reeves has said a better use of technology and cuts in the use of consultants could deliver Whitehall savings, as well as reductions to budgets for communications and travel.
“I’m confident that we can reduce civil service numbers by 10,000,” Reeves told Sky News’ Trevor Phillips.
Dave Penman, head of the FDA civil service union, warned that the cuts could lead to big job losses and harm public services. “The idea that cuts of this scale can be delivered by cutting HR and comms teams is for the birds,” he said.
Meanwhile Sir Keir Starmer, prime minister, will try to show on Monday that he is still investing in voters’ priorities in spite of the straitened public finances, setting out details of a pothole-filling programme.
