Reeves prepares to prove her ‘iron clad’ fiscal credentials
Chancellor Rachel Reeves will take centre stage tomorrow with the release of her long-anticipated departmental spending review. While not a headline-grabbing fiscal event like the Autumn Budget, it’s a vital moment for signalling how the UK intends to balance fiscal restraint with growth ambitions—particularly in a volatile global environment dominated by rising yields and US fiscal turbulence.
Reeves has repeatedly emphasised that her fiscal rules are “non-negotiable”, but the reality she faces is a precarious one. UK public finances are under pressure from higher borrowing costs, soft growth forecasts and rising structural demands on public spending. Her challenge will be to show that the UK can maintain credibility without triggering fresh market anxiety.
Debt costs balloon as bond markets turn up the heat
“High government debt is not a new phenomenon,” said Matthew Amis, Investment Director at Aberdeen. “But in recent years, debt loads and debt servicing costs have ballooned.” The UK is expected to spend over £100 billion servicing its debt in 2024–25—around 8% of total government spending, according to the OBR.
The dynamic is far from unique to the UK. In the US, debt servicing is approaching a trillion dollars. “With Trump’s showcase big beautiful tax bill close to completion, those funding costs look like they are only going one way—it’s not down,” Amis warned. “Increased US fiscal deficits could put upward pressure on US yields, dragging UK government yields higher in response.”
For Reeves, tomorrow presents an opportunity to differentiate the UK’s fiscal management from that of the US. “She needs to reinforce her fiscal rules, build confidence and crucially, to differentiate the UK from the US’ fiscal excess,” Amis added. “Big decisions lie ahead, but they’ll be easier if gilt yields are heading lower.”
Tight fiscal leash, limited tax levers
Oliver Jones, Head of Asset Allocation at Rathbones, echoed concerns about the Chancellor’s limited room for manoeuvre. “The Spending Review highlights again the precarious path that Rachel Reeves must tread,” he said. “She is hamstrung by demographic pressure on health and welfare spending, a harsher geopolitical environment requiring a bigger defence budget, and structurally higher borrowing costs.”
Jones expects Reeves to impose tough spending restraint outside the NHS and defence, and to double down on public sector productivity drives. But there are political risks. “She’s pledged not to raise the four big revenue-generating taxes—income tax, NI, VAT and corporation tax—while thresholds remain frozen. That leaves limited options. Down the line, the risk of further rises in taxation on capital gains, pensions and inheritance is growing.”
IMF urges flexibility—but markets may not allow it
The International Monetary Fund has also weighed in, with what Anthony Willis, Senior Economist at Columbia Threadneedle, called “a mixed message” for the Chancellor. The IMF encouraged Reeves to stick to her fiscal rules but also recommended greater flexibility to avoid frequent policy changes prompted by small economic revisions.
“The IMF suggested fewer OBR forecasts and a new communications strategy to reduce the focus on small headroom figures,” Willis explained. “It also warned that Reeves’ fiscal room for manoeuvre is inadequate, and that further spending cuts or tax rises would be needed ‘if shocks arise’.”
Willis noted that rising interest rates had already eroded much of Reeves’ fiscal buffer between last autumn and the Spring Budget. “If the Debt Management Office can issue cheaper, shorter dated debt, this could ease some pressures at the margin. But the room for error is slim.”
Growth remains fragile and politically sensitive
Although the IMF slightly raised its UK growth forecast for 2025 to 1.2%, that still lags the pre-tariff forecast of 1.6%. Medium-term growth is seen as subdued at around 1.4%, due to weak productivity—a persistent drag on the UK’s fiscal sustainability.
Meanwhile, domestic pressures mount. The government’s recent reversal of controversial welfare cuts and increased long-term defence commitments both add to the challenge. As Willis put it: “The Liz Truss era still weighs heavily on the government’s thinking and its determination to look credible on public finances.”
A critical signal for markets
While tomorrow’s announcement won’t come with the fanfare of a Budget, it carries significant weight. For wealth managers and financial advisers, it’s an important indicator of how the UK intends to navigate its narrow fiscal corridor—and whether gilt markets will respond with confidence or caution.
Chancellor Reeves has the opportunity to show that the UK can stand apart from global fiscal excesses—but she’ll need to convince both markets and voters that the hard choices ahead are worth it.
We’ll be bringing you all the news and views relevant to wealth managers in relation to the spending review right here on WealthDFM/Economy section tomorrow so please do check in with us then.
