Why UK's Rachel Reeves Wants Next Week's Budget Update Kept Low-Key

By William Schomberg

LONDON, Feb 25 (Reuters) - British finance minister Rachel Reeves is due to announce new economic forecasts in an annual budget update speech on Tuesday that she is hoping will be a low-key affair, in contrast to the three, more momentous fiscal events she has overseen since taking office.

However, fresh budget challenges for Reeves and Prime Minister Keir Starmer - which could add to the debt burden, already at its heaviest since the 1960s - lie ahead, and it is even unclear if they will still be in their jobs to tackle them.

Spring Forecast and Fiscal Outlook

WHAT IS REEVES LIKELY TO DO? 

What Reeves Will Announce

Reeves will announce to parliament the latest projections from the Office for Budget Responsibility whose forecasts underpin her spending and tax plans. The OBR is expected to trim its short-term projections for economic growth and inflation. It will also announce public borrowing forecasts.

Forecasts Not Included

WHAT FORECASTS WON'T BE ANNOUNCED?

The OBR will not judge how much spending "headroom" Reeves now has left to stay within her fiscal targets. She has said that she wants to deliver only one major fiscal event a year - the government's full budget statement in the autumn.

Fiscal Headroom Estimate

HOW MUCH HEADROOM DOES SHE HAVE?

The OBR judged in November that the headroom stood at almost 22 billion pounds ($30 billion), more than double a previous estimate but still a small margin for error by historical standards.

Analysts estimate that the headroom has barely changed since November but Reeves is at risk of having to raise taxes further or cut spending in future if she is knocked off course by weaker-than-expected growth, higher spending or other factors.

Why Keep It Low-Key

WHY DOES REEVES WANT TO MAKE TUESDAY LOW KEY?

Rife speculation about tax hikes preceded each of Reeves' three previous fiscal events - two full budgets and an update last March. Similar worries ahead of November's full budget were blamed for weak economic growth in late 2025.

Political Backdrop

UK POLITICAL INSTABILITY, AGAIN 

Reeves and Starmer promised to end the political upheaval unleashed by Brexit. Reeves hopes a routine Spring Forecast will encourage businesses to invest and households to spend some of the savings they have racked up in recent years.

But Starmer's grip on Downing Street looks shaky after low poll ratings, policy U-turns and the continuing fallout from his decision to name Peter Mandelson as U.S. ambassador over a year ago despite Mandelson's ties to Jeffrey Epstein.

An election on Thursday for a parliamentary seat and local elections in May will further test his leadership.

What to Expect in Autumn

WHAT MIGHT HAPPEN IN THE AUTUMN?

Bigger policy announcements are likely in Reeves' next full budget in November.

By then, it will be clearer if she remains on course to meet her fiscal targets or needs to raise taxes or cut spending. As well as the twists and turns of the economy, one factor that could knock her off course is net migration to Britain, which has fallen sharply, potentially slowing overall economic growth.

The government may also have to find a way to fund extra spending on defence in the coming years.

Potential Defence Spending

Starmer has said Britain should accelerate defence spending after the BBC said he might bring forward a target to spend 3% of economic output on the military, something the OBR has said would cost an extra 17 billion pounds a year.

Special Educational Needs Costs

Other new demands on spending include a reform of Britain's special educational needs programme.

Exchange Rate Note

($1 = 0.7407 pounds)

(Writing by William Schomberg; Editing by Hugh Lawson)