Britain’s new Labour government has axed several construction projects, apart from withdrawing a winter fuel payment for millions of retirees to cover what it called a newly uncovered 22-billion-pound (USD 28 billion) shortfall in the public finances inherited from the previous Conservative administration.
The Keir Starmer-led was voted in with a landslide victory on July 4 and has largely used its first three weeks in office to inform the public that conditions in nearly every area of public policy are worse than anticipated.
As soon as Rachel Reeves was appointed finance minister, she gave the go-ahead for a new study on the demands for public funding, which she will utilize further to prepare for her first official budget statement later 2024.
The assessment revealed a shortfall of about 20 billion pounds (USD 26 billion), according to the news reports. In her first major speech as Treasury chief, Rachel Reeves accused the previous government of covering up the dire state of the nation’s finances, as she commented, “They (the Rishi Sunak government) ducked the difficult decisions, they put party before country and they continued to make unfunded commitment after unfunded commitment, knowing that the money was not there, resulting in the position that we have now inherited.”
According to the UK Finance Ministry, Rachel Reeves will also announce the creation of a new Office of Value for Money, a campaign against government waste, a reduction in the use of outside consultants, and the sale of underutilized government property.
Rachel Reeves, the United Kingdom’s first female Chancellor of the Exchequer, said the audit had found several sources of excess spending pressures, with nearly half of the total identified as a result of the non-accounting of upcoming pay awards in the public sector.
A 6.4 billion-pound overspend in the asylum system was also identified, partly connected with the failed plan to send migrants on a one-way journey to Rwanda. Among other commitments, Rachel Reeves said spending on the war in Ukraine had not been fully funded.
The Labour Party, which leans left, had excluded raising the rates of income tax, value-added tax, and other primary taxes during the election campaign. The Conservative party rejected these claims as a ruse to increase taxes.
Notwithstanding extensive reports of financial difficulties in sectors like healthcare and prisons, the independent Office for Budget Responsibility approved the March 2024 budget projections.
While not announcing any changes in taxes, Rachel Reeves also set out a series of “difficult” savings to recoup money over the coming couple of years, including the establishment of an office to identify “wasteful spending.”
“Some transportation projects where funding has yet to be determined will be axed, including a contentious plan to dig a tunnel near Stonehenge, while the previous government’s new hospital program will be scrapped and replaced by one that is thorough, realistic and costed timetable for delivery,” Associated Press reported.
In what seems to be a controversial move, Rachel Reeves announced that a winter payment currently going to all retirees to help pay for fuel will now be given only to those most in need. A plan to limit the costs individuals pay for their care in old age will be abandoned.
Rachel Reeves also put lawmakers on notice that there may be some tax increases when she delivers her first budget on October 30. “It will involve taking difficult decisions, across spending, welfare and tax,” she added further.
Labour, back in power after 14 years, pledged during the campaign that it wouldn’t raise taxes on “working people,” saying its policies would deliver faster economic growth and generate the additional revenue needed by the government. Rachel Reeves could look to raise more revenue by other means such as closing tax loopholes, particularly on capital gains or inheritance.
Critics, especially Rachel Reeves’ predecessor Jeremy Hunt, argued that his successor was trying to score early political points in the new Parliament, and that she knew full well the state of the public finances during the general election.
“If you’re in charge of the economy, it’s time to stop trash-talking it. She will fool absolutely no one with a shameless attempt to lay the grounds for tax rises that she didn’t have the courage to tell us about,” Jeremy Hunt said in response to Rachel Reeves’ speech.
Rachel Reeves also announced a series of pay agreements with staff in the public sector, from teachers to doctors. The Keir Starmer administration has also reached an agreement with unions to end the long-running strike of doctors in England in the early years of their careers. It will see so-called junior doctors getting a 22% pay increase over two years.
The Institute for Fiscal Studies, a well-respected economic think tank, had accused both main parties during the election of a “conspiracy of silence” over the scale of the financial challenges facing the next government, with the country’s debt burden running at nearly 100% of national income, its highest level since the early 1960s.
However, the IFS now appears to think that the situation was even worse than predicted and that Rachel Reeves is “within her rights to feel somewhat aggrieved,” especially about the asylum bill.
IFS Director Paul Johnson said, “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.”