By William Schomberg

LONDON (Reuters) - British finance minister Rachel Reeves is working out how she can get back on track to meet her budget targets, with spending cuts widely expected when she delivers an update on the public finances on March 26.

The Office for Budget Responsibility, Britain's fiscal watchdog, sent its latest estimates for the economy and the public finances privately to Reeves on Tuesday.

When it makes its findings public, it is expected to say that Reeves is off course to meet her key rule of balancing day-to-day public spending with tax revenues by the end of the decade.

WHAT IS THE SPRING STATEMENT?

Reeves announced her first budget last October which raised taxes on employers and added to borrowing. She said she intended to hold only one major fiscal event a year, turning what used to be the spring budget into a simpler forecast update.

However, given the possibility that Reeves will have to adjust her plans, the Spring Statement has become a test of the new government's economic programme.

WHAT HAS REEVES SAID?

Reeves says she will make changes to her plans if needed, potentially easing the nerves of investors about Britain's debt burden but also weighing on already weak economic growth.

That would further strain the budget with defence spending now set to grow sharply, and hurt the standing of Prime Minister Keir Starmer's Labour government.

WHY IS REEVES AT RISK OF MISSING HER TARGETS?

In October, Reeves left herself a small margin of 9.9 billion pounds ($12.6 billion) for meeting her budget rule by the 2029/30 financial year.

That margin was further reduced after Donald Trump's election as U.S president raised global concerns about inflation and higher borrowing costs, and by Britain's weaker-than-expected economic growth.

Think tanks have said there is a strong chance that the Office for Budget Responsibility will judge that Reeves has lost all her fiscal headroom on March 26.

SPENDING CUT OPTIONS

The previous Conservative government stayed on track to meet its fiscal rules largely by promising spending cuts in future years. Those promises eventually looked so unrealistic that the head of the OBR branded them as worse than fiction.

Reeves will therefore be under pressure to make some of any spending cuts she announces apply in the short term.

The BBC reported on Wednesday that Reeves had earmarked billions of pounds in cuts to spending on welfare and other government departments.

Consultancy Pantheon Macroeconomics predicted she would shave 5 billion pounds off welfare spending in the 2025/26 financial year and backload another 5 billion pounds of public spending cuts.

TAX INCREASES AHEAD?

Analysts at Citi said Reeves might be facing a bigger, 12 billion-pound fiscal hole which she might seek to fill via cuts to welfare and departmental spending, before making tax changes in a full budget in late 2025.

Pantheon and Citi said she could raise about 7 billion pounds a year by extending a freeze on the thresholds at which people start to pay different rates of income tax.

That tactic, which leads to big increases in the amount of income tax paid to the government, was begun by the Conservatives who froze the thresholds until April 2028.

Reeves said in October that she would raise them in line with inflation thereafter.

Reversing that decision would still allow Reeves and Starmer to argue they had not broken the letter of their promise to voters that they would not raise the rates of income tax.

LONGER-TERM PROBLEM

While Reeves is expected to make the fiscal sums add up to get back on track for her targets on March 26, she faces the bigger risk that at some point the OBR cuts its optimistic-looking forecasts for Britain's economic growth.

The watchdog's October forecast for growth of 2.0% this year contrasts with the Bank of England's recent halving of its projection to 0.75%.

The OBR has previously overestimated the chances of a productivity improvement. Should it lower its assumptions, its economic growth forecasts will also fall, reducing its estimates of tax revenues, pushing up expected borrowing and forcing further tough choices on Reeves to stick to her targets.

Another uncertainty is the impact of Trump's U.S. import tariffs on the world economy. Reeves said on Tuesday that Britain was likely to be hit indirectly by U.S. tariffs imposed on China, Canada and Mexico.

($1 = 0.7859 pounds)

(Writing by William Schomberg; Editing by Christina Fincher)