News
Chancellor Rachel Reeves to cut projects after finance review
Rachel Reeves will claim the Tories masked the true state of the UK’s public finances and then ‘ran away’
The Chancellor is expected to announce immediate cuts worth billions of pounds, aimed at plugging a deficit in the public finances, when she addresses Parliament on Monday.
Rachel Reeves’ plans are expected to include the cancellation of some road and rail projects, a reduction in spending on external consultants and a move to reduce waste in the public sector.
She will accuse the previous government of “covering up” deficits in departmental budgets and then “running away”.
However, the Conservative Party said the Chancellor’s message was designed to “mislead the British public” so she could raise taxes.
An internal Treasury audit of public finances will be published on Monday and is expected to show a further gap of around £20 billion between tax revenues received and expected spending.
The Chancellor will tell Parliament this requires “immediate action” to restore economic stability and “fix the fundamentals of our economy”.
Projects that could be paused or cancelled include the road tunnel near Stonehenge and Boris Johnson’s New Hospital programme.
Labour has said it will not borrow to fund “day-to-day costs”, meaning it will only pay for things using money it has already raised in taxes.
However, Labour has previously said it could borrow to invest, which would give it some leeway on projects such as HS2.
During the election campaign, the Conservatives made similar commitments on taxes and spending.
Economists said at the time that neither party could follow its own self-imposed rules without spending cuts or tax increases.
Leading economists warned before the election that the math didn’t add up and that the new government would face a stark choice between raising taxes, cutting spending or abandoning its commitments to reduce debt in the medium term.
But the new government said it found the situation was even worse than it expected, describing it as “catastrophic”with extra demands on government coffers being uncovered as new ministers went through their departments’ accounts with a fine-tooth comb.
Ms Reeves is said to have been “genuinely shocked” by some of the findings.
However, she will not suggest at this point that tax increases will be necessary.
Instead, she will invite the Office for Budgetary Responsibility to undertake an assessment of public finances. It will also initiate the process for a Spending Review, which looks at departmental budgets over the long term.
Budgets or similar fiscal events will be held only once a year, and Ms. Reeves is expected to set a date for the first one in the fall.
Insiders suggest that if the Chancellor had wanted to raise taxes she would have held an emergency Budget this week, but instead she will reaffirm manifesto commitments not to raise personal tax rates, including income tax.
Monday’s announcement is “about difficult spending decisions”, Pat McFadden, Chancellor of the Duchy of Lancaster, told the BBC.
“It’s true that we knew we were going to inherit a difficult situation, but what we’ve discovered in the few weeks since we took office is that it’s even more difficult because of things we’ve discovered that weren’t revealed before the election.”
Michael Saunders, senior adviser at Oxford Economics, believes there will be “a smaller but “still very sharp” reduction in public spending, as well as larger tax increases.
“I hope the Chancellor can find several examples… of projects that the [previous] the government had announced but never funded or underfunded, or that they are over budget or late,” he told the BBC’s Today programme.
“The chancellor could therefore claim that public finances are even worse than feared.”
The tunnel near Stonehenge is one of the projects that could be halted to save money
Ms Reeves is also expected to announce that some public sector workers will receive pay increases in line with recommendations from independent pay review bodies.
That would mean above-inflation deals for teachers, members of the military and prison staff, among others, but it would mean finding the money to pay for that, too.
The Chancellor is said to believe the cost of funding the deals must be weighed against the cost of disruption to the economy caused by the strikes and the cost of failing to recruit and retain staff.
The Chancellor will also announce a new “Office of Value for Money” to identify and recommend savings, including in the current financial year, so that “low-value spending is cut before it starts”.
Last week, Home Secretary Yvette Cooper said the Conservatives’ plan to remove asylum seekers to Rwanda had cost taxpayers £700 millionalmost double the price that was previously in the public domain.
Other departments have identified spending needs not covered by current budget plans. On Sunday, Environment Secretary Steve Reed said his department had found the condition of flood defences was “much worse than we were led to believe”.
The Conservative Party said the state of public finances was clear before the election.
Former Conservative chancellor Jeremy Hunt accused the new government of “peddling nonsense”. The books were “wide open and what they show is a healthy and growing economy”, he said.
And transport secretary Helen Whately told BBC Breakfast: “Labour has taken control of a strong economy – the fastest growing in the G7, with historically low unemployment – which has left them in a positive position.”
She said Labour was “undoubtedly creating a narrative” to raise taxes.