Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Chancellor Rachel Reeves on Monday claimed to have inherited a £22bn fiscal hole from the Conservatives, as she announced a set of “incredibly tough choices” that she said would rebuild Britain’s economic foundations.
Reeves axed road and hospital schemes to help plug the gap and scrapped the previous Tory government’s promise to carry out a retail share sale of the state’s NatWest holding. She also cut winter fuel payments for better-off pensioners.
Reeves confirmed that an Autumn Budget, to be held on October 30, would include tax rises, along with more cuts to spending and welfare budgets. A multiyear spending review would take place at the same time, she said.
Although Reeves blamed the Tories for the fiscal “mess”, her support for above-inflation public sector pay rises — including a 22 per cent two-year pay offer to striking junior doctors — added fuel to budgetary pressures.
She announced that she would meet in full the recommendations of public sector pay review bodies for 2024/25, amounting to £9bn of the £22bn that she said the Tories had left unfunded.
Reeves insisted to MPs that “tough decisions” were required because public spending was in an even worse state than she had imagined when she entered the Treasury on July 5.
Jeremy Hunt, shadow chancellor, dismissed the claim as “sham” designed to soften up the British public for tax rises in an Autumn Budget. He said Reeves had had access to the books and the permanent secretary to the Treasury before the election.
But Reeves insisted that Hunt had hidden pressures building up in the system, including what she claimed was a £6.4bn of unfunded costs in Britain’s chaotic asylum system, as well as a hole in the funding of the railways and aid for Ukraine.
“Upon my arrival at the Treasury three weeks ago, it became clear that there were things I did not know,” she said. “Things that the party opposite covered up from the country.”
Reeves claimed the government’s reserves had been spent “three times over in the first three months of this financial year” and that Rishi Sunak’s government had misled voters. “They gave false hope to Britain,” she said.
Reeves claimed that so-called “in year” pressures on departmental budgets could not have been spotted by the independent Office for Budget Responsibility fiscal watchdog in its last report in March.
“I will restore economic stability,” she said. “I will never stand by and let this happen again. We will fix the foundations of our economy.”
But the biggest cause of this year’s spending squeeze was Reeves’s decision to give inflation-busting pay rises to public sector workers, as she sought to draw a line under months of workplace unrest.
She agreed an improved offer to junior NHS doctors in England to end a wave of strikes that have contributed to high hospital waiting lists and caused major disruption.
The British Medical Association union agreed to recommend the new pay offer to its members. Officials confirmed the BMA would put forward a proposal amounting to a rise of 22 per cent over two years.
The deal, which could end two years of industrial disputes, falls below doctors’ demand for a 35 per cent pay increase but is significantly above previous offers by the last Conservative government.
Reeves agreed to meet in full recommendations by independent public sector pay review bodies for a pay rise of 5.5 per cent for teachers and other NHS workers, well above the current inflation rate of 2 per cent.
Treasury insiders have calculated that meeting the 2024-25 pay proposals in full for all public sector workers would cost £9bn more than Conservative ministers had budgeted for.
Economists said the strains on Whitehall budgets were fuelled by recent high inflation, which reached a 41-year peak at more than 11 per cent in October 2022. It had hit current budgets and added to the cost of capital projects, including hospitals and roads.
Among the projects delayed was Boris Johnson’s “New Hospital Programme”, which promised 40 new hospitals by 2030. Labour officials said the project was “unfunded and based on unfeasible timelines” and Reeves said it would be subject to a thorough review.
Road and rail projects were also sacrificed by Reeves, opening her up to criticism that a government committed to construction and growth had begun its term in office shelving big capital projects.
The long-discussed A303 tunnel at Stonehenge has been axed alongside improvements to the A27 south coast trunk road, along with a Johnson-era plans to reopen former railways lines.
The Treasury also announced that its plan to apply VAT to private education would come into force on January 1 2025.
Credit: Source link
