The Treasury has instructed Government departments to prepare for potential budget freezes as part of a major spending review scheduled for June, despite Labour's earlier promises to avoid austerity measures.
Departments are now submitting funding bids for 2026 to 2029, with unprotected areas such as justice, culture, trade and local Government facing the prospect of significant cuts amid pressure from high borrowing costs and stagnant economic growth.
Senior officials from unprotected departments have revealed the Treasury's specific demands for budget planning.
One official, speaking anonymously, said they were instructed to model "flat cash" spending plans, which would result in significant real-terms reductions when accounting for inflation.
Chancellor Rachel Reeves allocated the majority of a £50 billion spending increase for 2028-29 to protected areas
Getty ImagesAnother official disclosed they were asked to prepare for cuts of between 3 per cent and 5 per cent in real terms.
The Treasury has not yet responded to requests for comment on these preparations.
While unprotected departments face cuts, Chancellor Rachel Reeves allocated the majority of a £50billion spending increase for 2028-29 to protected areas.
Health, education and defence budgets remain ring-fenced from potential reductions.
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The Institute for Fiscal Studies estimated last October that other departments could face £9billion in real-terms cuts to day-to-day spending.
Labour's pledge to avoid austerity stands in stark contrast to the current Budget preparations.
Speaking at last year's party conference, Chancellor Rachel Reeves had emphatically stated: "No return to austerity - Conservative austerity was a destructive choice for our public services, and for investment and growth too."
The spending cuts would likely face resistance from Labour MPs, who campaigned in last year's election on ending austerity and repairing Britain's public services.
Current challenges include record-high healthcare backlogs, councils near bankruptcy, full prisons and deteriorating roads.
The Treasury has indicated the spending envelope for 2026-27 to 2028-29 cannot be increased but may be reduced.
The Office for Budget Responsibility will present its first forecast estimate to Reeves on Tuesday, potentially determining if action is needed to rebuild fiscal headroom.
Current market conditions suggest the Chancellor has just £5billion of flexibility - the smallest amount since 2010.
The Office for Budget Responsibility will present its first forecast estimate to Reeves on Tuesday
Gov.UK
Reeves has suggested she would consider cuts to welfare or departmental spending if necessary, having ruled out additional tax increases.
The full spending review, which will determine the allocation of funds between departments, is set to be published in June.
While departments remain in discussions with the Treasury, the current modelling of "flat cash" and real-terms cuts likely represents a worst-case scenario.
The outcome could have significant implications for public services, with healthcare backlogs near record levels, several councils approaching bankruptcy, and prisons at capacity.
The OBR will provide four additional forecast updates before its final economic assessment on March 26.
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