Rachel Reeves raided pensioners and signalled tax hikes are coming today as she claimed there is a £22billion hole in the public finances.
In a crucial Commons statement, the Chancellor accused the Tories of leaving the government’s books in an ‘even worse’ state than she feared.
Pointing to sky-high spending on policies such as the Rwanda scheme, Ms Reeves said the reserve had been ‘exhausted’ and decisions on pay awards had been ‘ducked’.
Asylum system costs were £6.4billion over budget this year, while transport was £1.6billion over, and support for Ukraine was also not fully funded.
She laid out plans to slash road projects – including shelving a long-awaited tunnel under Stonehenge – and make departments find savings.
But Ms Reeves argued that was not enough, saying she had no choice but to strip all pensioners who do not receive pension credit – around 10million people – of winter fuel payments worth up to £300. That will save the government £1.5billion.
The long-awaited cap on social care costs will be put on ice rather than taking effect in 2025, as Wes Streeting had promised would happen.
VAT will be applied to private school fees from January 1 next year – earlier than had been anticipated. Anyone paying fees in advance after today will also be hit with the levy.
Ms Reeves also teed up tax rises in the Budget on October 30 – with a £16.4billion gap still needing to be closed. Inheritance tax and capital gains are viewed as likely targets, after Keir Starmer ruled out moves on income tax, national insurance and VAT.
Despite the dire warnings Ms Reeves has accepted pay recommendations in full – giving the green light for inflation-busting rises for public sector workers, at an estimated cost of £9.4billion.
She also said junior doctors have been offered a package worth a whopping 22 per cent over two years to settle their dispute.
That will cost billions of pounds more, and spark concerns about fuelling inflation, potentially making it less likely that the Bank of England cuts interest rates this week.
Responding, shadow chancellor Jeremy Hunt branded the claims from Ms Reeves ‘fiction’ and a ‘cock and bull story’, and said she was perpetrating ‘the biggest betrayal in history’.
The Tories repeatedly warned that Labour would target pensioners and raise taxes during the election campaign.
MoneySavingExpert Martin Lewis raised alarm that winter fuel payments were being ‘too narrowly targeted’, saying people just above the credit threshold would be hit.
The Age UK charity said they would ‘strongly oppose’ the means-testing of winter fuel payments and warned up to two million pensioners who ‘badly need the money’ will miss out.
In her statement Ms Reeves revealed:
- Teachers and nurses are set to receive a 5.5 per cent pay boost, armed forces personnel will get a 6 per cent increase, prison service workers 5 per cent and the police 4.75 per cent;
- The A303 Stonehenge project and A27 work near Arundel are among the transport upgrades being halted to save £1billion;
- Rishi Sunak’s Advanced British Standard qualification is being abandoned to save £200million;
- Departments will be asked to find savings of £3billion to help stabilise the books;
- The Budget will take place on October 30 – three days before Mr Sunak is replaced by a new Tory leader;
- Tories accused ministers of misleading Parliament by tabling outdated estimates last week without the new spending estimates.
In a crucial Commons statement, Chancellor Rachel Reeves accused the Tories of leaving the government’s books in an ‘even worse’ state than she feared
The OBR has written to the Chancellor saying it is reviewing whether it was misled about the state of the public finances at the last Budget
In a statement to the Commons this afternoon, Ms Reeves laid out plans to slash road projects – including a long-awaited tunnel under Stonehenge
The tax burden is already running near a post-war record high
Ms Reeves accused the Tories of ‘covering up the true state of the public finances’ before ‘running away’.
She told MPs: ‘The Government published its plans for day-to-day spending in the spring budget in March.
‘But when I arrived in the Treasury, on the very first day I was alerted by officials that this was not how much the previous government expected to spend this year – it wasn’t even close.
‘In fact, the total pressures on these budgets across a range of areas was an additional £35billion.
‘Once you account for the slippage in budgets you usually see over a year and the reserve of £9billion designed to respond to genuinely unexpected events, it means that we have inherited a projected overspend of £22billion.
‘A £22billion hole in the public finances now, not in the future, but now – £22billion of spending this year that was covered up by the party opposite. If left unaddressed it’d mean a 25 per cent increase in the budget deficit this year.’
Hitting back at jibes that she knew the state of the finances, Ms Reeves said: ‘Some, including the Leader of the Opposition and the shadow chancellor, have claimed the books were open. How dare they. It is not true and let me tell you why.
‘There are very clear instances of specific budgets that were overspent and unfunded promises that were made, but that, crucially, the OBR was not aware of for their March forecast.’
In relation to the Home Office budget, she said: ‘The document I’m publishing today reveals a projected overspend on the asylum system, including their failed Rwanda plan, for this year alone of more than £6.4 billion. That was unfunded and it was undisclosed.’
Ms Reeves said she was accept all recommendations from public sector pay bodies.
And she confirmed that she has offered junior doctors an improved increase – roughly equivalent to 22 per cent over two years.
‘Industrial action in the NHS alone cost the taxpayer £1.7billion last year,’ she said.
‘That is why I am pleased to announce today that the Government has agreed an offer to the junior doctors which the BMA are recommending to their members.’
Ms Reeves added: ‘Today marks the start of a new relationship between the Government and staff working in our National Health Service, and the whole country will welcome that.’
The £1.7billion Stonehenge road tunnel is among the capital projects inherited by the Government that Ms Reeves has concluded are ‘unfunded with unfeasible timelines’. The Conservatives’ flagship New Hospital Programme is also set to be scaled back.
‘Surplus’ sites owned by the NHS, Ministry of Defence and Network Rail are all being considered for sale.
The Chancellor also announced a fresh crackdown on the non-essential use of external consultants as part of a wider drive to cut down on waste in the public sector.
A new Office of Value for Money will be established, using existing civil service resources, to cut down on wasteful government spending.
However, she conceded that sums raised from cuts will not come anywhere close to plugging the £22billion funding gap apparently identified in Labour’s ‘audit’.
Ms Reeves said: ‘This level of overspend is not sustainable. Left unchecked, it is a risk to economic stability and, unlike the party opposite, I will never take risks with our country’s economic stability.
‘So, it therefore falls to us to take the difficult decisions now to make further in-year savings. The scale of the situation we are dealing with means incredibly tough choices.
‘I repeat today the commitment that we made in our manifesto to protect the triple-lock but today I am making the difficult decision that those not in receipt of pension credit or certain other means-tested benefits will no longer receive the winter fuel payment from this year onwards.
‘The Government will continue to provide winter fuel payments worth £200 to households receiving pension credit or £300 to households in receipt of pension credit with someone over the age of 80. Let me be clear, this is not a decision I wanted to make, nor is it the one I expected to make – but these are the necessary and urgent decisions that I must make.’
Mr Hunt shot back: ‘If you’re in charge of the economy, it’s time to stop trash-talking it.
‘What’s the point of going to New York or Brazil to bang the drum for more investment if you come home with a cock-and-bull story about how bad everything is?
‘She should stop playing politics with Britain’s reputation and get on with running the economy.’
Outside of the Commons, finance guru Lewis said the cut would leave some struggling to heat their homes this winter.
‘The targeting of Winter Fuel Payments is too narrow with the winter we have coming,’ he said.
‘Pensioners were already due to get less as this will be the first time since winter 2022 they haven’t got the up to £300 extra winter fuel cost of living top-up.
‘The Energy Price Cap is likely to rise 10 per cent this October and stay high across the winter, leaving most energy bills nearly double those pre-crisis, at levels unaffordable for millions.
‘Many pensioners eke out the £100 to £300 Winter Fuel Payments to allow them to keep some heating on through the cold months.
‘While there’s an argument for ending its universality due to tight national finances, it’s being squeezed to too narrow a group – just those on benefits and Pension Credit. Yet again, those just above the thresholds will be hardest hit.’
Caroline Abrahams, charity director at Age UK, said: ‘We strongly oppose the means-testing of winter fuel payment because our initial estimate is that as many as two million pensioners who badly need the money to stay warm this winter will not receive it and will be in trouble as a result – yet at the other end of the spectrum well-off older people will scarcely notice the difference – a social injustice.
‘A big reason for this disastrous outcome is that more than one in three pensioners entitled to pension credit, the qualifying benefit for WFP under this proposal, don’t receive it, a proportion that’s been roughly constant for many years.
‘More than 800,000 older people living on very low incomes – under £218.25 a week for single pensioners and under £332.95 for couples – who are already missing out of the pension credit they are entitled to get to boost their incomes, will now lose the WFP that helps them to pay their fuel bills.
‘In addition, there are also about a million pensioners whose weekly incomes are less than £50 per week above the poverty line, who will also be hit hard by the loss of the payment.
‘Older people in this group often tell us they really struggle financially; the proposed change will make it even harder for them to afford to stay warm when it gets chilly.
‘Finally, there is a third group who will find it extremely difficult to heat their homes adequately this winter as a result of the proposed change: older people whose incomes are a little higher though still limited, but who live in energy inefficient homes and/or who are seriously unwell and need to keep the thermostat turned up high in order to protect their health.’
But unions were delighted by Labour’s decisions to dip into taxpayer funds for bumper pay deals.
TUC General secretary Paul Nowak said: ‘Her approach stands in stark contrast to the previous government, who played political games with the pay review bodies.
‘I hope this is the crucial first step in dealing with the recruitment and retention crisis blighting our schools and hospitals.
‘And it will need to be accompanied by a long-term plan for the public sector workforce.’
The FDA, which represents civil service professionals, said the pay boost of up to 5 per cent for Whitehall officials was the ‘right decision’.
General secretary Dave Penman said: ‘For too long we’ve seen pay eroded due to short-term decision-making, with a broken pay system leading to record churn in the civil service and causing a crisis in recruitment and retention across the public sector.
‘I appreciate that this announcement comes against a challenging economic backdrop and some departments may have some difficult decisions to make to achieve the efficiencies outlined by the Chancellor, but I welcome that the Government has recognised that public sector pay must be a priority.
‘If we want world-class public services then we must invest in the public servants that deliver them, and this announcement is the first step in the right direction.
‘There is still significant work to do and the FDA will continue to engage with the Government to improve the pay system so that it properly rewards hard work, attracts the skills and expertise we need, and provides the necessary progression to attract and retain talent.’
Mr Reeves jettisoned ditched the Tory aim to launch a ‘Tell Sid’-style share sale of its remaining 20 per cent stake in NatWest.
The former Government had been planning to launch a share sale in the lender to retail investors this summer, before it was put on hold due to the surprise July 4 General Election announcement.
Ms Reeves told the House of Commons: ‘We intend to fully exit our shareholding by 2025-26.
‘But having considered advice, I have concluded that a retail share sale offer would involve significant discounts that could cost taxpayers hundreds of millions of pounds.
‘It would therefore not represent value for money.’
She added: ‘It will not go ahead. It’s a bad use of taxpayer money and we will not do it’.
The bank – formerly known as Royal Bank of Scotland – was at one stage 84 per cent owned by the State after a mammoth £46 billion bailout at the height of the financial crisis.
The Treasury has been selling down its stake in the lender, which also owns Coutts, as part of aims to return it fully to private hands.
NatWest has seen the taxpayer stake in the group drop to below 20 per cent in recent weeks, down from about 38 per cem in December, as the Government has continued to sell down its shareholding.
Attention will now turn to how Ms Reeves will raise more revenue. She will be urged to consider clobbering more than 30million drivers by Treasury officials to help plug the gap.
She is expected to look at allowing the 5p fuel duty cut to expire next March.
The 5p a litre fuel duty cut was introduced in March 2022 by then Tory Chancellor Mr Sunak to ease the cost-of-living burden on families amid soaring oil prices.
But prices at the petrol pumps have since fallen significantly and Treasury officials believe it is time to hike the motoring tax, it is understood.
Ms Reeves will also be asked to consider whether fuel duty should rise in line with inflation for future years.
The previous Tory government froze the Fuel Duty Escalator for 14 years, meaning the levy remained 57.95p a litre between 2011 and 2022 and has been 52.95p since the 5p cut.
Analysis shows the successive freezes have been worth at least £80billion to drivers collectively.
Reversing the 5p cut and allowing the Escalator to rise with inflation would add about £100 to the annual fuel bill of the average driver, of which there are around 33million in the UK.
It could net the Treasury as much as £3billion to £4billion extra a year in tax receipts.
Treasury officials have also drawn up plans to equalise capital gains tax with income tax and lower relief on pensions savings for up to 6million higher earners.
The Institute for Fiscal Studies said some of the details set out by Rachel Reeves were ‘shocking’, although not all the spending pressures were a surprise.
IFS director Paul Johnson said: ‘Rachel Reeves is within her rights to feel somewhat aggrieved. It was always clear and obvious that the spending plans she inherited were incompatible with Labour’s ambitions for public services, and that more cash would be required eventually.
‘But the extent of the in-year funding pressures does genuinely appear to be greater than could be discerned from the outside, which only adds to the scale of the problem.
‘But not all of what we heard should have come as a terrible surprise. ‘
Public pay recommendations were always likely to be higher than the 2 per cent rises that had been budgeted for and the NHS often needs extra cash for the winter.
Mr Johnson added: ‘If the scale of these overspends and spending pressures was apparent in the spring – and in lots of cases, there’s no reason to suppose otherwise – then it is hard to understand why they weren’t made clear or dealt with in the spring Budget.
Inheritance tax and capital gains are viewed as likely targets for the October Budget, after Keir Starmer ruled out moves on income tax, national insurance and VAT
