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Rachel Reeves set to reveal £20bn black hole in public finances
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Rachel Reeves is ready to reveal a black hole in the public finances of around £20 billion, signalling that tax rises could be on the way.
O chancellor goes on monday laid out the results of the spending audit she ordered Treasury officials to produce.
The findings appear to confirm concerns raised during the election campaign by influential Institute for Fiscal Studies (IFS) who accused the main parties of a “conspiracy of silence” by failing to address the reality of public finances.
Asked by BBC Radio 4’s Today programme this morning whether the black hole was a surprise, IFS director Paul Johnson said: “I don’t think it’s really credible. There shouldn’t be a sense of surprise, there’s a big problem here.”
He pointed out that cuts in recent years and the way public sector wages had lagged behind those in the private sector made it clear that public services would need investment.
He warned: “The words of the manifesto [from Labour] “no new taxes on workers” means there can be no tax increases.”
Ms Reeves and Labour spent much of the election denying Tory claims they would raise taxes by around £2,000 per household, but there could now be a series of increases to try to plug the gap.
In particular, council tax and capital gains tax are believed to be on the radar for increases after Labour refused to rule out increasing them during the election.
Ms Reeves’ update will reveal “the true scale of the damage the Tories have done to the public finances”, a Labour source said.
The chancellor was at a meeting of G20 finance ministers in Brazil, where she confirmed that the declaration will take place on Monday.
But his Conservative predecessor Jeremy Hunt, now shadow chancellor, dismissed Ms Reeves’ claim as “a fabrication”.
He said: “Labour’s claims are a fabrication – the books have been wide open since the OBR was set up 14 years ago. They show an economy that has turned the corner and a deficit a third of that left by Labour – not this nonsense the Chancellor is peddling.
“The reality is that she doesn’t want to make the tough decisions about wages, productivity or welfare reform that would allow us to live within our means, and she’s laying the groundwork for tax increases.
“After Labour promised 50 times not to do this, they will find that confidence in the new government will evaporate sooner than they expected.”
Labour sources did not deny reports that an initial assessment found an annual gap of almost £20bn between revenues and funding commitments, including in areas such as care and public sector pay.
The figure could still change as each department’s spending commitments are assessed ahead of Ms Reeves’ statement in the Commons.
No tax rises to cover the shortfall in spending on essential public services are expected before the autumn Budget, the date of which Ms Reeves is also due to announce on Monday.
Labour has ruled out raising income tax, VAT, national insurance and corporation tax, but changes to capital gains or inheritance taxes could be on the table.
Asked about the black hole at the G20 finance ministers’ meeting in Brazil, Ms Reeves said: “I will make a statement to parliament on Monday, but I have always been honest about the scale of the challenge we face as a new government, and let me be absolutely clear: we will fix the mess we inherited.”
The Labour source said: “On Monday the British public will finally see the true scale of the damage the Tories have done to the public finances.
“They spent taxpayers’ money like there was no tomorrow because they knew someone else would have to foot the bill.
“It is now up to the Labour Party to fix the foundations of our economy and that work has already begun.”
In presenting the audit findings, Ms Reeves is expected to argue that Mr Hunt’s pre-election plans would require significant cuts to already financially struggling public services.
The Chancellor is widely expected to be forced to raise taxes in the Budget to avoid the spending cuts implicit in existing plans and to meet her fiscal rule of having debt reduced as a share of gross domestic product within five years.
Ms Reeves will also respond to public sector pay recommendations as the government needs to find the money for above-inflation increases.
Reports have suggested that teachers and NHS workers could be entitled to a 5.5% pay rise, which could cost around £3.5 billion more than budgeted.