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Whitehall departments are preparing for tougher spending adjustments this summer, as the Treasury seeks to lock in savings after a jump in borrowing costs.
Officials have warned of “really tough choices” in the upcoming spending review – with some departments warning it will be difficult to afford to tighten spending given the cuts in recent years.
“We really have to think about how to implement what we are planning at lower costs,” said an Interior Ministry official. “We are worried.”
The official said comprehensive work on the spending review strategy has not yet begun, but there is growing concern in the ministry that the spending adjustment will be reduced.
They added that there are concerns that “we will have to look at how we can spend the money more effectively or work with partners to see how we can leverage our money.”
They added, however, that Downing Street acknowledged that the Home Office had received a particularly “tough compromise” in the autumn budget – with a 3 per cent annual spending cut – giving hope they could be spared some of the pain that will come next. In the next spending review.
An Education Ministry official also said that rising government bond yields – which reduce the government's fiscal space – raises the specter of increased spending restraint in the coming months.
Another aide said he felt as if markets were “testing” Labour's administration, adding that the government would need to demonstrate it was pressing ahead with cost-cutting plans to reassure investors it could be trusted with the economy.
“There will be really tough choices in the spending review in a few months’ time,” the person added.
This concern came in the wake of rising British bond yields, which, by some estimates, have eliminated the chancellor's space in confronting 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 “thin margin” against the UK’s fiscal rules if they persist.
The government sought to calm nerves in financial markets on Thursday, with Darren Jones, chief secretary to the Treasury, insisting it would not breach its fiscal rules and that there was still healthy demand among investors for British government debt.
During Thursday, the yield on 10-year government bonds rose to 4.93 percent, its highest level 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.
Rising bond yields would impact the Office for Budget Responsibility's estimates of the government's future bills on debt interest payments, which already exceed £100 billion a year. The OBR is due to release its forecast on March 26, which will be accompanied by a statement from Chancellor Rachel Reeves to Parliament.
Reeves was expected to meet her current key rule, which excludes borrowing for investment, by a narrow margin of £9.9bn according to estimates accompanying the October Budget. Analysts now believe the leeway has evaporated due to market movements – even before any changes in growth and inflation expectations.
Jones told the Commons that the Treasury was working on a multi-year spending review scheduled for this summer based on assumptions set out in the October budget. The Office for Budget Responsibility's forecasts will have an impact on discussions with ministers.
Additional reporting by Ian Smith in London
