LONDON (Reuters) – Britain’s new Labour government cancelled several building projects and withdrew winter fuel payments to millions of pensioners on Monday to cover what it said was a new 22 billion pound ($28 billion) deficit in the public finances inherited from the previous Conservative administration.
In her first major speech as Treasury chief, Rachel Reeves accused the previous government of covering up the dire state of the country’s finances following a ministerial spending review she commissioned three weeks ago in the wake of Landslide victory for the Labour Party.
“They avoided tough decisions, put party before country, and continued to make one unfunded commitment after another, knowing the money wasn’t there, leading to the situation we now inherit,” she said.
Reeves, the UK’s first female chancellor to the Treasury, said the audit found several sources of overspending pressure, with nearly half of the total identified as a result of not taking into account upcoming public sector pay bonuses.
Overspending of £6.4 billion in the asylum system was also identified, partly linked to the failed plan to send migrants on One way flight to RwandaAmong other commitments, Reeves said spending on the war in Ukraine has not been fully funded.
Although he did not announce any tax changes, Reeves laid out a series of “hard” savings to get the money back over the next two years, including creating an office to identify “wasteful spending.”
Some transportation projects for which funding has not yet been determined will be cancelled, including: Controversial plan to dig tunnel near StonehengeWhile the previous government’s new hospital programme will be scrapped and replaced with a “comprehensive, realistic and time-bound” programme.
Perhaps most controversially, Reeves announced that the winter payment currently given to all pensioners to help pay for fuel would now be given only to those most in need. A plan to reduce the costs individuals pay for their care in old age would be abandoned.
Reeves also warned lawmakers that there could be some tax increases when she delivers her first budget on Oct. 30. It will involve “making tough decisions … on spending, on welfare and on taxes.”
Labour, which returned to power after 14 years, pledged during the election campaign not to raise taxes on “workers”, saying its policies would lead to faster economic growth and generate much-needed additional revenue for the government. Reeves may seek to raise more revenue through other means, such as closing tax loopholes, particularly on capital gains or inheritance.
Critics, particularly her predecessor Jeremy Hunt, claim that Reeves is trying to score early political points in the new parliament, and that she was fully aware of the state of the public finances during the general election.
In response to Reeves’ letter, Hunt said: “If you are in charge of the economy, it is time to stop vilifying it. She will fool absolutely no one with a brazen attempt to lay the groundwork for tax increases that she did not have the courage to tell us about.”
Reeves also announced a series of pay deals with public sector workers, from teachers to doctors. Most significantly, she said the government had reached an agreement with unions to end long term strike Doctors in England in the early years of their careers will be able to get a 22% pay rise over two years.
The Institute for Fiscal Studies, a respected economic think tank, had accused the two main parties during the election of a “conspiracy of silence” about the scale of the fiscal challenges facing the next government, with the country’s debt burden reaching nearly 100% of national income, its highest level since the early 1960s.
But even the Institute for Fiscal Studies seems to think the situation was worse than expected and that “Reeves has a right to feel somewhat aggrieved”, particularly over the asylum bill.
“It has always been clear that the spending plans I inherited are not in line with Labour’s ambitions for public services and that more money will eventually be needed,” said Paul Johnson, director of the Institute for Fiscal Studies. “But the scale of the annual funding pressures really does look greater than we can imagine from the outside, which adds to the scale of the problem.”
