Chancellor Rachel Reeves on Monday set out a series of “incredibly tough choices” to fill in a £22bn fiscal hole she claims she inherited from the Conservatives, as she paved the way for Budget tax rises in the autumn.
Reeves announced emergency savings, including a £1.5bn cut to winter fuel payments for better-off pensioners, the axing of road and hospital schemes and the dropping of plans to cap social care costs.
But she said this would not be enough, confirming that a Budget on October 30 would be painful. A multiyear public spending review would take place at the same time, she added.
“There will be difficult decisions around spending, around welfare and around taxes,” Reeves said, while insisting that “working people” would be spared increases in income tax, value added tax and national insurance.
Although Reeves blamed the Tories for the fiscal “mess”, her support for above-inflation public sector wage rises — including a 22 per cent two-year pay offer to striking junior doctors in England — added fuel to budgetary pressures.
She announced she would meet in full the recommendations of independent public sector pay review bodies for 2024-25, amounting to £9.4bn of the £22bn that she said the Tories had left unfunded.
“Instead of giving winter fuel payments to pensioners, they have chosen to bend to the pressure from the unions by giving a 22 per cent pay rise to junior doctors,” shadow energy secretary Claire Coutinho said.
Reeves claimed spending was in an even worse state than she had imagined when she entered the Treasury on July 5 and that much of the £22bn fiscal gap would have to be closed in the Budget.
Shadow chancellor Jeremy Hunt dismissed the claim as a “sham” designed to soften up the British public for tax rises in the autumn Budget. He said Reeves had had access to the books before the election.
But Reeves insisted Hunt hid pressures that were building up, including £6.4bn of unfunded costs in Britain’s chaotic asylum system, as well as a hole in railway funding and in aid for Ukraine, which she vowed to protect.
“Upon my arrival at the Treasury three weeks ago, it became clear that there were things I did not know,” she said. “Things that the party opposite covered up from the country.”
The chair of the independent Office for Budget Responsibility, Richard Hughes, aided Reeves’s case by expressing “concerns about the transparency and credibility” of the information he was given in preparing fiscal forecasts alongside Hunt’s March Budget. He said he would review the process.
The biggest single cause of the £22bn fiscal hole was Reeves’s decision to give inflation-busting pay rises to public sector workers, as she sought to draw a line under months of workplace unrest.
She agreed an improved 22 per cent two-year offer to junior NHS doctors in England to end a wave of strikes, which the British Medical Association union agreed to recommend to its members.
The deal, which could end two years of industrial dispute, falls below doctors’ demand for a 35 per cent pay increase but is significantly above previous offers by the last Conservative government.
Reeves agreed to meet in full recommendations by public sector pay review bodies for wage increases typically in the 5 to 6 per cent range — well above the current 2 per cent rate of inflation.
The previous government had planned for a 2 per cent rise, meaning that meeting the 2024-25 public sector pay proposals across the board would cost £9.4bn more than planned. Reeves said the 5.5 per cent settlement was in line with the private sector and insisted it was not inflationary.
To help fill the immediate hole in the current financial year, Reeves will limit winter fuel payments to people receiving pension credit and other means-tested benefits, saving £1.5bn per annum. She has asked Whitehall departments to find £3bn in savings, including consultancy bills.
The scrapping of Rishi Sunak’s Rwanda asylum scheme is intended to save £1.4bn, while Reeves said it would “not be possible” to roll out a Tory pledge to cap social care costs by October 2025, saving £1bn.
Among the infrastructure projects delayed was Boris Johnson’s “new hospital programme”, which had promised 40 new hospitals by 2030. Labour officials said the project was “unfunded and based on unfeasible timelines” and Reeves added it would be subject to a thorough review.
Road and rail schemes were also sacrificed by Reeves, saving £785mn but opening her up to criticism that a government committed to construction and growth had begun its term in office shelving big capital projects.
The long-discussed A303 tunnel at Stonehenge in south-west England has been axed alongside improvements to the A27 south coast trunk road. Johnson-era plans to reopen former railways lines have also been dropped.
The Treasury announced that its plan to apply VAT to private education would come into force on January 1.
It also said it was moving ahead with plans for a tax crackdown on private equity bosses and wealthy expatriates who have so-called non-dom status.
The government has followed through on a pledge to increase the windfall tax on North Sea oil and gas companies.
From November 1, the energy profits levy will be three percentage points higher, increasing the overall tax rate on the sector to 78 per cent.
The government will extend the levy by one year to March 2030 and, significantly for the industry, remove investment allowances.
Additional reporting by Rachel Millard in London
