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Rachel Reeves set to reveal billion-dollar funding shortfall
The new chancellor is expected to use a public spending audit to make allegations of a “black hole” in government finances worth tens of billions of pounds.
Rachel Reeves said she would make a statement to Parliament on Monday showing “honesty” about the scale of the challenge facing the new Labour government.
She promised to “fix the mess we inherited” but stopped short of confirming speculation that the public finance deficit was more than £20bn a year.
The Conservative Party accused the new government of “peddling nonsense”.
Labour will suggest the Conservatives have left several crucial public services unfunded, in areas ranging from public pay to prisons.
“On Monday the British public will finally see the true scale of the damage the Tories have done to the public finances,” a Labour source said.
“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 Labour to fix the foundations of our economy and that work has already begun.”
However, Conservative shadow chancellor Jeremy Hunt said Labour’s claims were “nothing but a fabrication” and accused the government of “laying the groundwork for tax rises”.
On Monday, Ms Reeves will also set out the Government’s response to public sector pay recommendations, which are around 3% higher than current spending plans.
The Chancellor is likely to accept some above-inflation pay deals for public sector workers after being warned by independent pay bodies about recruitment and retention challenges, and having calculated that the public is eager to end months of rolling strikes.
Cabinet ministers have spent the week saying a full review of their departments’ books has revealed more “serious” problems than previously anticipated.
The opposition says this is an elaborate effort to curry favor with the public and demand some tax increases in the autumn Budget.
The “black hole” arises because the government says it needs to spend extra money to keep public services running.
However, governments make their own rules about how much they borrow to fund public services like the NHS and how the country’s debt is managed.
Paul Johnson, director of the Institute for Fiscal Studies think tank, said it was difficult to know how big the deficit in public finances was because it depended on how much the government wanted to spend.
The Labour Party has promised not to raise taxes “on working people”, including most aspects of National Insurance, income tax and VAT.
“Big tax increases, given the restrictions they have imposed themselves, are not impossible, but they would be very difficult,” he told BBC Radio 4’s Today programme.
The extra money the government needs to find to meet self-imposed debt targets in the future has been labeled a “black hole.”
Some economists suggested during the election that many of these spending pressures, and the possibility of tax increases to finance them, were obvious and should have been made clear to the voting public.
While the BBC understands there will be no tax policy announcements on Monday, the implication of the audit is that the Treasury will spend the summer trying to find extra savings, or extra tax revenue, to fill this “black hole”.
A more optimistic economic outlook from the independent forecaster Office for Budget Responsibility on the impact of government plans would also help to improve some tricky trade-offs between spending and tax increases.