The British government on Wednesday laid out plans for higher military spending and cuts to social benefits, as it sought to keep the nation’s finances on track in what it called a “more uncertain world.”
Rachel Reeves, the chancellor of the Exchequer, said the government would spend 2.2 billion pounds ($2.8 billion) more on defense in the fiscal year that begins next month.
Last month, Prime Minister Keir Starmer said that military spending would rise to 2.5 percent of gross domestic product by 2027, which would be paid for by cutting overseas aid. On Wednesday, Ms. Reeves reiterated recently announced reductions to the benefits system, alongside a few other changes, that would save about £5 billion by 2030.
The changes come as President Trump’s economic policies have disrupted the global economy, putting more demands on the British government’s already stretched budget. Like many other European countries, Britain has pledged to spend more on defense to support Ukraine in its war with Russia. At the same time, the threat of a global trade war is lurking and interest rates have increased, pushing up government borrowing costs.
“Our task is to secure Britain’s future in a world that is changing before our eyes,” Ms. Reeves said in Parliament on Wednesday. “This moment demands an active government,” she later added.
But the government is facing hurdles, particularly a sluggish economy. Growth slowed in the second half of last year, and the Office for Budget Responsibility, an independent watchdog, halved its forecast for growth this year to 1 percent from 2 percent. It said a lack of economic momentum and waning confidence among businesses and households would weigh on output this year, though there would be some rebound in next years.
Less than five months ago, shortly after the Labour Party came into power, Ms. Reeves presented her first budget, announcing a substantial increase in short-term public spending, a commitment to increase investment and a sharp rise in taxes, particularly for employers. Ms. Reeves had said she wanted to reduce the number of big announcements on tax and spending, preferably down to just one per year, to provide more stability for households and businesses.
But since the budget was released in October, there has been a surge in economic uncertainty, much of it derived from sweeping and unpredictable policy changes in the United States since Mr. Trump’s return to office.
That has made Wednesday’s budget update, known as the Spring Statement, more consequential because it was the first big opportunity for Ms. Reeves to respond to the economic upheaval. Ms. Reeves also had to show how she would keep her fiscal promises after higher interest rates and weaker economic growth wiped out the headroom she had built into the budget.
The fiscal rules, which include a commitment to not borrow for day-to-day spending by the end of the decade and for a measure of national debt to be falling by then, were “nonnegotiable,” Ms. Reeves said.
“The British people have seen what happens when a government borrows beyond its means,” she said, a reference to how punishing investors can be at signs of fiscal irresponsibility, like during Liz Truss’s premiership in late 2022, when her government’s fiscal plans sent turmoil through British bond markets.
Ms. Reeves resisted the pressure to substantially change course. She did not announce any meaningful changes to taxes, but instead focused on spending plans, including a slight reduction in public spending starting in 2026. The measures are expected to save the government £14 billion in 2030.
The Office for Budget Responsibility confirmed that the cuts to welfare and overseas aid, measures to crackdown on tax evasion and changes to the planning system to make it easier to build homes and infrastructure meant that the government would rebuild a buffer against its fiscal rules.
But it would not take much to eliminate that headroom again, Richard Hughes, the chairman of the office, said.
Paul Johnson, the director of the Institute for Fiscal Studies, said this was “a holding exercise” and Ms. Reeves would probably have to make more “really significant decisions” later in the year.
Pressure on the budget is not unique to Britain. In response to wavering U.S. commitment for Ukraine, most European countries are planning to spend more on defense, but they are already facing high debt levels and a lackluster economic growth outlook. Still, these pledges are set to have far-reaching fiscal consequences as Europe prepares to borrow much more.
Next week, the Trump administration is set to impose what it is calling reciprocal tariffs on many countries. Britain is hoping to avoid the brunt of these tariffs and is in negotiations with the United States but is not immune to the uncertainty that has hampered business investment and shaken financial markets around the world.
Ms. Reeves has had little room to maneuver partly because of rising interest rate payments, which climbed to £105 billion for the fiscal year that ends this month, more than what is spent by the defense department, justice ministry and the interior ministry combined.
And the Bank of England has been cutting rates slowly because of lingering inflation risks. On Wednesday, data showed that Britain’s annual inflation rate slowed to 2.8 percent in February because of lower clothing prices, a temporary respite before inflation is expected to rise again through most of this year.