Chancellor of the Exchequer Rachel Reeves made one thing clear during an audit of UK government spending on Monday: the new Labour government plans to frontload the bad news and repair and rebuild the economy, leaving as much time as possible before the next election in five years’ time.
Reeves promised during the election campaign that he would always deal fairly with the British people, and he has wasted little time since taking office. Just over three weeks into his term, he said the outgoing Conservative government had left behind £21.9 billion in “unfunded and undisclosed” spending commitments, then outlined a series of measures to address budget pressures.
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Around 10 million pensioners will not pay winter fuel charges from this Christmas as a result of measures Reeves announced in the House of Commons on Monday. He also scrapped rail and road projects and reviewed hospital building plans pushed through by former prime minister Boris Johnson as part of measures to shore up the public finances and support above-inflation pay rises for more than five million civil servants.
In the end, the Chancellor made £5.5 billion in savings, leaving a budget shortfall of £16.4 billion, laying the groundwork for a painful, potentially tax-hiking budget to be published on October 30th.
“We will have to make some more difficult decisions on spending, on welfare and on taxes later this year,” Reeves said at a news conference after the House of Representatives statement.
During the election, Labour promised that faster growth would free up funds to fix Britain’s aging public services, leading many economists to predict that a one-year spending review would give the economy time to recover and limit tax increases needed to repair public services when a multi-year spending review comes later in 2025.
The party now appears to have abandoned the growth solution. Mr Reeves will set ministerial spending caps for at least three years in his budget and set out detailed plans in the spring. The first year’s spending totals will be brought forward to October, giving departments time to plan for 2025-26, but this timetable does not allow time for Labour’s planning and investment reforms to take effect. Mr Reeves will also stick to the manifesto’s fiscal framework, which leaves little room for borrowing, the Treasury said.
Ruth Gregory, deputy chief UK economist at Capital Economics, said she expected the £16.4 billion shortfall to be made up by £10 billion in tax increases and £7 billion in extra borrowing.
Reeves has ruled out raising the main rates of VAT, national insurance, income tax and corporation tax, but increases to capital gains tax and inheritance tax are widely thought to be under consideration.
For now, it’s pensioners who will lose out. This traditionally Conservative voter demographic has been protected since 2010 by a so-called “triple lock” on pensions, which means their pensions rise each year by the greater of inflation, wage increases or 2.5%. Mr Reeves said he would maintain these protections, but announced changes to the winter fuel allowance – a policy launched by former Labour chancellor Gordon Brown in 1997 – which will now only apply to pensioners receiving the benefit, saving £1.4 billion a year. Former Treasury officials, including former Treasury chief executive Nick Macpherson, welcomed the decision, one in a series of measures announced to shore up Britain’s finances.
Reeves put the blame on the Conservatives, accusing them of getting Labour into financial trouble and then covering it up until after the election – an allegation backed up by the Office for Budget Responsibility, Richard Hughes, in a letter to the Treasury Select Committee. He said the Office for Budget Responsibility “only became aware of the extent of these pressures last week” and that “it will be our biggest budget surplus over the next 12 months outside of the pandemic”.
Former Conservative Chancellor Jeremy Hunt hit back at Mr Reeves’ claims, saying it was “shameless” that these measures were not included in Labour’s manifesto at all.
Since the July 4 general election, the war of words has taken on a new, more aggressive tone that is likely to determine the direction of the next five years. In a complete role reversal, Reeves is adopting the Conservative tactics of 2010, when new Conservative prime minister David Cameron blamed Labour for the financial crisis and fiscal collapse. Reeves and other ministers now argue that their successor government is the worst since the Second World War and that they are left with no acceptable options.
But the biggest “unfunded” cost Reeves revealed on Monday was arguably Labour policy rather than an earlier promise: He approved a 5-6% public sector pay rise, in line with the recommendations of the independent pay review body, but with only 2% budgeted for inflation, at an extra cost of £9.4bn, from which departments have been told to find savings of £3.2bn.
“Half of the spending ‘hole’ is civil servant pay, where the government has made decisions and where pressure has been placed,” Paul Johnson, director of the Institute for Fiscal Studies, told X. He added that “the challenges across spending were known and remain.” This is on top of a separate agreement that junior doctors, who went on strike on Monday to end their strike, will get a pay increase of up to 24.6%.
Other spending pressures this financial year outlined by the Treasury include:
To help cover the costs, Labour also scrapped plans to increase the out-of-pocket savings limit for older people from £23,000 to £100,000 from next year, saving £1 billion next year and £4 billion by the end of the parliament. Transport programmes including a proposed road tunnel near Stonehenge were dropped, and savings were also seen in an earlier government decision to scrap Conservative plans to forcibly return asylum seekers to Rwanda.
The government also pressed ahead with tax proposals outlined in its election manifesto, including a 20% VAT surcharge on private school tuition fees from 1 January next year. Tax relief for non-residents will be scrapped for income earned after 6 April next year, and UK energy profits tax will rise to 38% from 1 November, according to a document. But Mr Reeves made it clear there would be more pain.
“What I took most from Reeves’ remarks is that there is still a lot of work to be done,” said Nick Davis, program director at the Institute for Government. “The announced savings only cover a quarter of this year’s pressures. There will be a lot of unpalatable decisions to be made on October 30th.”
With assistance from Andrew Atkinson.
This article has been generated from an automated news agency feed without any modifications to the text.
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