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An audit commissioned by Britain’s chancellor, Rachel Reeves, has revealed an additional £21.9bn “black hole” in the country’s already strained public finances for this financial year. In a speech to parliament on Monday the finance minister claimed that the Labour government’s first three weeks in power had unveiled the true extent of spending needs across the UK’s public services.
It is, indeed, plausible that a closer examination has unearthed a number of unresolved matters that the government could not have known while in opposition. Reeves cited additional spending pressures across asylum, rail services, and assistance to Ukraine — alongside several apparently unfunded policy announcements made by the Conservatives.
Still, Labour was well aware that it would be inheriting a dire set of finances and public services. When the party published its manifesto, economists and think-tanks warned that it had baked in unrealistic cuts to unprotected departments. The Institute for Fiscal Studies cautioned that the party’s financing plans relied on optimistic assumptions of economic growth and uncertain revenue gains from clawing back on tax avoidance, too. But both Labour and the Conservatives ducked the fiscal realities during the election campaign.
A considerable chunk of the “black hole” comes from Reeves’s decision to follow through with the recommendations of public sector pay review bodies for above-inflation wage rises, amounting to over £9bn for 2024-25. The chancellor also confirmed a 22 per cent two-year pay rise offer to junior doctors. Resolving pay disputes could indeed limit future costs from strike action. But this is another expense — alongside the effects of inflation on spending commitments — that Labour should have seen coming, and budgeted for.
The government has also tied itself in knots with its manifesto promises. Reeves recommitted to not raising income tax, national insurance or VAT — which maccount for a significant share of government revenue. That leaves the chancellor with little wriggle room. Cuts to NI contributions made by the Conservatives — in part, to boost its vote — are roughly equal to the size of the “black hole”.
To start covering the shortfall, Reeves made some sensible announcements including to stop non-essential spending on consultants, review welfare spending and hasten efficiency improvements. But it is unfortunate that the chancellor has announced plans for cuts and delays to road and rail projects to make additional room. Britain needs capital investment to support growth, which drives productivity and revenue growth.
Yet, these cutbacks only filled part of the hole. This raises concerns that the chancellor will plump for further cuts to infrastructure investment and tax rises in the autumn Budget, which Reeves confirmed would be held on October 30. This includes the possibility of raising capital gains tax. Uncertainty over these taxes, or a significant increase to them, risks stifling wealth creators and undermining international competitiveness — particularly at a moment when Britain is experiencing an uptick in investor interest.
The government’s bad inheritance, coupled with its own commitments, leaves few good options to raise revenue. As it assesses its choices ahead of the autumn Budget, it should prioritise revenue-raisers that impose least damage on growth and investment. That means Labour may even need to revisit some of its manifesto pledges. Otherwise, the government risks falling into the same spiral that plagued the Conservative administration before it: sacrificing long-term economic growth to pay for stretched public services.