Chancellor Rachel Reeves Axes Projects After Reviewing $28 Billion Budget Hole
Britain’s Labour government said it was making “difficult decisions” concerning the budget, including cutting some road and rail projects and pension benefits, after accusing its predecessor, the Conservative Party, of leaving the country’s finances in a mess.
Rachel Reeves, the chancellor of the Exchequer, said on Monday that there was a hole of 22 billion pounds (about $28 billion) in the country’s coffers this year because spending needs had exceeded expected revenue. To begin plugging the gap, she announced a series of measures to cut about £5.5 billion this year and another £8 billion next year, including reducing spending on consultants and a previously announced decision to end a program to deport asylum seekers to Rwanda.
Ms. Reeves accused the Conservative Party of making spending commitments on plans such as road repairs and building new hospitals “knowing the money wasn’t there.” Some of those plans would scrapped or reviewed.
“The scale of this overspend is not sustainable,” Ms. Reeves told lawmakers in Parliament. She will present a full budget to lawmakers at the end of October.
But a substantial part of the spending gap comes from the Labour government’s plans to increase public sector pay. Ms. Reeves said she had accepted recommendations from independent review bodies to increase public sector wages about 6 percent this year, adding £9 billion to the budget. She said that government departments would need to find up to £3 billion worth of savings to help pay for this.
In addition, junior doctors in England on Monday were offered a 22 percent raise over two years in an effort to end strikes. The decision is a break from the Conservative government, which resisted pay increases that were higher than the rate of inflation, arguing that such a move would risk pushing up the country’s price pressures.
After a decade and a half of economic stagnation in Britain, the Labour Party campaigned on a mission to restore economic growth. But the party, led by Keir Starmer, warned that it would inherit a challenging set of fiscal circumstances because the tax burden was already high, debt interest payments had climbed and many public services were starved of cash, which was compounded by decades of weak investment.
With a strict eye on bringing debt levels down, Labour scaled back green investment plans and withheld committing to big public spending projects even before the election. Now it is sticking to this restraint. The government has said it would need to lean heavily on private sector investment to expand the economy.
After Ms. Reeves took over the mantle at the Treasury, she requested the department’s staff audit the country’s public spending plans, and said she found that the situation was worse than she expected.
She said spending on the asylum system, for example, was expected to be £6.4 billion more than expected this year, and the transportation department would need £1.6 billion more. Ms. Reeves said she was setting up an Office of Value for Money to identify savings to be made in this fiscal year.
“We need to be straight with the British public about what is deliverable and what is affordable,” she said.
Many economists have warned for months that the public finances would have to shaken up after the election. Spending plans for individual departments had been laid out until April next year, but after that, the picture was blurry. The budget, as it stood, implied big cuts to several departments that were already stretched, such as courts, prisons and local government, in order to increase spending on health care, education, child care and defense.
Economists and other analysts, including the Institute for Fiscal Studies, have argued that these cuts did not seem deliverable and that neither of the main political parties had been honest before the election about the scale of the pressures on the public finances, which would either require spending cuts or tax increases. Last week, Ben Zaranko, an economist at the institute, said that “a reckoning with the fiscal reality was inevitable.”
The Conservative Party said on Monday that Ms. Reeves’s claims about the public finances would be used as a precursor to raising taxes later in the year.
“Today she will fool absolutely no one with a shameful attempt to lay the ground for tax rises she didn’t have the courage to tell us about,” Jeremy Hunt, the previous chancellor, said in response to Ms. Reeves’s statement in Parliament.
In its election manifesto, the Labour Party promised not to increase income and corporation tax rates, or the value-added tax. But analysts have said there are still others — like the capital gains tax or inheritance tax — that could bring in billions of pounds in revenue if altered.
Ms. Reeves said Monday there would be more “difficult” choices on spending, welfare and taxes. “This is the beginning of a process, not the end,” she said.
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