Unlock Editor's Digest Lock for Free
FT editor Roula Khalaf will select your favorite stories in this weekly newsletter.
Prime Minister Rachel Reeves ordered a £2 billion Whitehall-efficient drive to fill the financial hole, but her financial issues could get worse in the medium term as she considers making tax concessions to President Donald Trump.
Reeves did not deny that the UK's annual digital services tax of £800 million is on the table in trade talks with the US.
The Prime Minister faces major financial problems ahead of the spring statement on Wednesday. After growth slowed and borrowing costs rose, it faced financial repair jobs of up to £15 billion.
The £2 billion cuts to Whitehall management costs by 2030 will help fill some of that gap, along with the £5 billion welfare cuts announced last week. The department's budget will also be significantly narrowed as courses are adjusted to meet Reeves' self-imposed borrowing rules.
Reeves and Pat McFadden, Ministers of the Cabinet Office, will write to all departments this week, telling them to cut their management budget by 15% by 2029-30. McFadden talks about the need for a “more agile state.”
Reeves says that consultant use could be better used, reduced consultant use, and communication and travel budgets could become part of a package to ensure that money is spent better on frontline services.
The Cabinet Office stated: “We can't stick to our business as usual. By reducing management costs, we can target resources with frontline services.”
Dave Penman, head of the FDA Civil Service Union, warned that cuts could lead to significant unemployment and harm public services. “The idea that this reduction in scale can be provided by reducing HR and Comms teams is for the birds,” he said.
But Reeves' financial dilemma could be further strengthened later in the year if the UK offers to cut or scrap the digital services tax, a collection that sparked the ire of US technology companies and the Trump administration.
The Financial Times revealed last week that the collection, which is expected to raise £800 million this year, had been on the table of talks with the US, aimed at minimizing tariffs placed on the UK since April 2.
The Prime Minister spoke to the BBC and did not deny that the tax was being discussed, but said, “Let's see how it will progress in the next few days.”
She argued that “it's right for companies operating in the UK to pay taxes in the UK,” but added, “We are currently discussing all the areas related to tariffs with the US.”
UK officials say the UK and the US are initially focusing on technology cooperation and are creating “responsibles” for transactions competing to complete it by April 2nd.
However, finance officials said in a spring statement that Reeves would not trade.
The UK's Digital Services Tax, which hits US tech giants, including Alphabet, Meta and Amazon, was introduced by the former Conservative government in April 2020 to ensure that global digital businesses, which reflect values derived from UK customers, will pay the tax.
The flat 2% tax applies to companies with global revenues of over £500 million and to revenues from the UK.
But the proposal to cut welfare and other areas of public spending while also offering tax concessions to the US tech giants could be politically toxic.
Daisy Cooper, a liberal Democratic Treasury spokeswoman, said, “It would be tantamount to stealing people with disabilities and appease Musk and Trump. The government should stand up for the British who have not succumbed to Trump and his US billionaire clergy.”
Reeves' statement on Wednesday, which is expected to last between 20 and 30 minutes, will be framed by the prime minister as her response to a “changing world,” but opponents argue that it is an acknowledgment of economic failure.
The deteriorating economic outlook wiped out the £9.9 billion headroom that gave her herself against her key financial rules in the October budget.
Officials say that with increased borrowing costs and slower growth, Reeves will need to find between £10 billion and £15 billion. Welfare savings total £5 billion, but switching spending from overseas aid to capitalized defense budgets gives you around £2 billion of flexibility. The crackdown on tax compliance could potentially win £1 billion in the office for forecasts of budget liability on Wednesday.
The remaining shortfall should consist of a reduction in departmental spending in Congress and savings in the Whitehall efficiency budget confirmed on Sunday.
