Rachel
Reeves expected to reveal £20bn shortfall in public finances
Chancellor
may raise some taxes in the autumn due to what Labour describes as its
‘shocking inheritance’ from Tories
Jessica
Elgot Deputy political editor
Thu 25 Jul
2024 20.58 BST
Rachel
Reeves is expected to reveal a £20bn hole in government spending for essential
public services on Monday, paving the way for potential tax rises in the autumn
budget.
Labour
sources said the blame lay with the Tory government, describing it as a
“shocking inheritance” and accusing the former chancellor of “presiding over a
black hole and still campaigning for tax cuts”.
They pointed
to spending concerns on the asylum system, welfare, defence and prisons.
However, work is still being done on the audit and the final figure of £20bn
could shift as officials examine the spending commitments of each department.
When Reeves
sets out the findings of her Treasury audit on Monday, she will also announce
the date of the spending review and the budget in October.
Experts
expect she will be forced to announce tax changes in the budget, with options
including capital gains or inheritance taxes and slashing other tax reliefs.
Reeves has ruled out changes to income tax, VAT, national insurance and
corporation tax – the largest revenue raisers.
The prime
minister, Keir Starmer, told business leaders this week that the public
finances were “in the worst place since the second world war”.
A Labour
source said: “On Monday, the British public are finally going to see the true
scale of the damage the Conservatives have done to the public finances.
“They spent
taxpayers’ money like no tomorrow because they knew someone else would have to
pick up the bill. It now falls to Labour to fix the foundations of our economy
and that work has already begun.”
Economists
have predicted Reeves will “kitchen sink” the bad news about the economy, in an
expected excoriation of the previous government’s record. The review is likely
to conclude that existing spending plans are unsustainable and would require
substantial cuts to public services, a position that economists had highlighted
repeatedly before the election.
Presenting
her Treasury audit to the Commons on Monday, the chancellor is expected to say
her review has revealed state and privatised services at risk of collapse under
current plans.
Further
billions are also committed in schemes like compensation for victims of the
infected blood scandal and of the Horizon failures at the Post Office. The
Cabinet Office minister, Nick Thomas-Symonds, told the House of Commons on
Thursday that final compensation payments to patients infected with
contaminated blood products and bereaved partners will begin to be made by the
end of this year.
On Monday,
Reeves will also set out the government’s response to the public sector pay
recommendations, which are about 3% higher than in current spending plans.
Government sources have suggested she is minded to accept the independent pay
bodies’ recommendations in full – a symbol of a new government approach – due
to the costs of provoking potential further industrial action.
The former
chancellor Jeremy Hunt is said to have believed that pay demands would have
eaten all of the Conservative government’s fiscal headroom – one of the key
reasons for Rishi Sunak calling an early election as it became clear there
could be no promised tax cuts.
Reeves is
expected to make it explicit that she believes her predecessor deliberately did
not act to address the looming spending shortfall. “Jeremy Hunt is going to
have a lot of explaining to do,” said one source.
She will
make references to how she will address the pressures in her speech on Monday,
but frame it as the first in a two-stage process that will be followed in the
October budget with work kicked off by the Office for Budget Responsibility.
The
economist Michael Saunders, a former external member of the Bank of England’s
monetary policy committee, said the Reeves review could be used to “justify
significant extra tax hikes, perhaps an extra £10bn-£25bn”.
He said in a
report this week: “We suspect the Reeves review will conclude that a more
realistic and sustainable outlook is likely to require a mix of higher public
spending, greater headroom versus the fiscal rules and a more plausible path of
fiscal tightening over the five-year forecast period.
“Any
political costs from higher taxes could be outweighed by the scale of Labour’s
majority and, using the cover of the review, putting the blame on the weak
fiscal position left by the previous Conservative government.”
Tax-raising
options on offer to Reeves include generating about £3bn a year, according to
the Institute for Fiscal Studies, by limiting inheritance tax relief on
agricultural and business assets, bringing pension pots within inheritance tax
and removing the capital gains uplift on inherited assets
But the
targeting of inheritance assets or pensions savings in particular is extremely
contentious and is likely to draw heavy criticism from the Conservatives.
As well as
setting out the major gaps in public spending projections, which experts had
already said were likely to require austerity-level cuts, Reeves will highlight
wasted opportunities for growth, including planning and investment.
The
communities secretary, Angela Rayner, is expected to follow Reeves on Tuesday
with Labour’s proposals to change national planning rules, including new
targets for local authorities and relaxing rules on building on parts of the
greenbelt. Those will go out for consultation before recess with the aim of
approval by the end of the autumn.
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