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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 promised to rebuild Britain’s economic foundations.
Reeves announced a £1.5bn cut to winter fuel payments for better-off pensioners, axed road and hospital schemes, dropped plans to cap social care and confirmed that Budget tax rises were on the way.
Although Reeves blamed the Tories for the fiscal “mess”, her support for above-inflation public sector pay rises — including a 22 per cent two-year pay offer to striking junior doctors — added fuel to budgetary pressures.
She announced that she would meet in full the recommendations of public sector pay review bodies for 2024/25, amounting to £9.4bn of the £22bn that she said the Tories had left unfunded.
Reeves confirmed that an autumn Budget, to be held on October 30, would include tax rises, along with more cuts to spending and welfare budgets. A multiyear spending review would take place at the same time, she said.
Reeves insisted to MPs that these were required because public spending was in an even worse state than she had imagined when she entered the Treasury on July 5, leaving longer-term fiscal problems.
Jeremy Hunt, shadow chancellor, dismissed the claim as a “sham” designed to soften up the British public for tax rises in an autumn Budget. He said Reeves had had access to the books before the election.
But Reeves insisted Hunt had hidden pressures building up in the system, including what she claimed was £6.4bn of unfunded costs in Britain’s chaotic asylum system, as well as a hole in the funding of the railways and aid for Ukraine. She said support for Kyiv would not be cut.
“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.
“I will restore economic stability,” Reeves said. “I will never stand by and let this happen again. We will fix the foundations of our economy.”
The biggest cause of this year’s spending squeeze 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 offer to junior NHS doctors in England to end a wave of strikes that have contributed to high hospital waiting lists and caused major disruption.
The British Medical Association union agreed to recommend the new pay offer to its members. Officials confirmed the BMA would put forward a proposal amounting to a rise of 22 per cent over two years.
The deal, which could end two years of industrial disputes, 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 independent public sector pay review bodies for a pay rise of 5.5 per cent for teachers and other NHS workers, well above the 2 per cent current rate of inflation.
The previous government had planned for a 2 per cent rise, meaning that meeting the 2024-25 pay proposals in full for all public sector workers would cost £9.4bn more than planned.
To help fill the immediate hole, Reeves will limit winter fuel payments to people receiving pension credit and other means-tested benefits, saving £1.5bn a year.
The scrapping of the 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 on social care costs by October 2025, saving £1bn.
Among the infrastructure projects delayed was Boris Johnson’s “New Hospital Programme”, which promised 40 new hospitals by 2030. Labour officials said the project was “unfunded and based on unfeasible timelines” and Reeves said it would be subject to a thorough review.
Road and rail projects 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 has been axed alongside improvements to the A27 south coast trunk road, along with Johnson-era plans to reopen former railways lines.
The Treasury also announced that its plan to apply VAT to private education would come into force on January 1 2025. It said was moving ahead with plans to close the carried interest tax “loophole” and reform the non-dom taxation regime.
Labour has followed through with its pledge to increase the windfall tax on North Sea oil and gas drillers. From November 1, the Energy Profits Levy will be three percentage points higher, taking the overall tax rate on the sector to 78 per cent.
It will also extend the levy by one year to March 31, 2030 and, significantly for industry, remove investment allowances.
Additional reporting by Rachel Millard