Rachel Reeves reveals plans to cut spending by £5.5bn and address ‘unforgivable’ inheritance
Rachel Reeves announced spending cuts worth £5.5bn as the new government seeks to address a £22bn blackhole in the public finances.
In a statement to the House of Commons, the Chancellor said the “inheritance from the previous government is unforgivable”.
“They spent like there’s no tomorrow because they knew someone else would pick up the bill,” she said.
But former Chancellor Jeremy Hunt dismissed Reeves’ claims as “nonsense”, arguing the ‘black hole’ came largely from “discretionary public sector pay awards”.
Reeves’ statement detailed the results of an internal Treasury audit on the state of the public finances commissioned by the Chancellor upon entering office.
The review found that there is expected to be a roughly £22bn overspend on departmental budgets this year compared to the spending envelopes laid out in the Spring Budget.
The £22bn figure includes unfunded commitments from the previous government, such as £6.4bn for asylum seekers and support for railways during the pandemic worth just under £3bn.
It also includes funding for a 5.5 per cent pay rise for workers across the public sector. The public sector pay rise, confirmed today by the new government, cost over £9bn, making up a large portion of the black hole.
But Reeves claimed that the Conservatives had failed to increase departmental budgets to cover public sector pay settlements. She stressed there was also a cost to not settling with the unions.
To help plug the gap in the public finances, Reeves set out immediate plans to make £5.5bn in savings, helping to bring in-year funding pressures down to just over £16bn.
To fund the public sector pay awards, the Chancellor said she has asked departments to find savings worth around £3.2bn, as part of which all “non-essential” spending on communications and consultancies will be cut.
The Chancellor also announced plans to introduce means testing on winter fuel payments, which will save £1.4bn this year.
The measure, which Labour says will target support at the most vulnerable households, will see the number of households eligible to receive the winter fuel payments falling from 8.4m households to 1.5m households.
A range of infrastructure projects, including the A303 tunnel under Stonehenge and Boris Johnson’s Restoring Your Railway Fund, were also shelved.
“These are not the decisions I wanted to make. But they are the right decisions in difficult circumstances,” she told the House.
To help ensure “greater certainty and stability” for departments going forward, Reeves laid out plans to ensure spending reviews will take place every two years, with each covering a three-year period. The last spending review took place back in 2021.
In addition, Reeves pledged that the government would hand over more information to the Office for Budget Responsibility (OBR) to improve its scrutiny of government spending commitments.
“I will never stand by and let this happen again. We will fix the foundations of our economy,” she said.
In response to the statement, the OBR said it will review the forecasts it prepared alongside the Spring Budget. Richard Hughes, chair of the OBR, said the spending overshoot would be one of the largest outside of the pandemic.
The watchdog said it would assess “the adequacy of the information and assurances provided to the OBR by the Treasury regarding departmental spending”.
Over the months ahead, the Chancellor will look to reduce funding pressures further before the Budget, which is scheduled for 30 October.
The Chancellor reiterated her commitment not to raise taxes on “working people”. However, the Budget will almost certainly contain tax hikes which were not included in the manifesto, with capital gains tax and inheritance tax two of the measures rumoured to be under consideration.
The government also published a call for evidence today on its manifesto commitment to close the carried interest loophole on private equity. It also confirmed plans to introduce VAT on private school fees and extend the windfall tax on energy companies.