Chancellor to Reveal £20bn Public Finances Black Hole in Address to MPs
At 3:30pm today, the new Chancellor, Rachel Reeves, will address Members of Parliament with the news of an approximately £20bn black hole in the public finances. This deficit will require immediate spending cuts and pave the way for tax increases in an October budget.
Reeves and her team will then challenge the Tories over their knowledge of this shortfall and the timing of their actions. They hope to keep this issue at the forefront of voters’ minds going into the summer.
Although Labour insists that this deficit comes as a surprise, Monday’s announcement will shed light on important details and nuances that were previously unknown. Here are the key points to watch for:
Immediate Spending Cuts and Upcoming Budget Date
Reeves will announce that the last Tory government has exceeded their budget for the 2024/5 financial year by approximately £20bn. She will then outline immediate cost-saving measures to cover a portion of this deficit. However, not all of the £20bn will be covered, and Reeves has been advised that action must be taken immediately to prevent market backlash.
The Chancellor will also reveal the date of the budget, where the remaining shortfall will likely be addressed through tax increases and further spending cuts.
What to Expect
The “black hole” only pertains to the 2024/5 financial year. This means that other budget issues for future years, such as the contaminated blood compensation scheme, will not be addressed in Monday’s announcement.
Examining the Breakdown
While some items have been identified as contributing to the £20bn deficit, others remain unknown. The state of prisons and the increasing costs of housing asylum seekers in hotels are two contributing factors. Additionally, the decision to accept above-inflation pay rises for public sector workers, such as teachers and NHS staff, will also play a role in the deficit.
Political Choices and Potential Future Cuts
Reeves will face difficult decisions as she works to address this deficit. Some items in the “black hole” are the result of political choices, such as accepting pay review body recommendations. Even Labour, while in opposition, did not guarantee that they would accept these recommendations.
Examining the Numbers
While the cost of satisfying pay review body recommendations may be estimated at £10bn and the cost of housing asylum seekers may be estimated at £4bn, it is important to consider the shortfall in these areas rather than the overall cost. The Treasury has already budgeted for some of these expenses, so the actual deficit may be less than the estimated amounts.
Debating the Deficit
The Institute for Fiscal Studies has raised concerns about the predictability of some of the overspends contributing to the deficit. Reeves and her team may challenge this stance, arguing that they were not aware of the extent of the deficit until they took office. This debate between Labour and the IFS is expected to be contentious.
Evidence of Negligence
Labour asserts that Reeves was presented with the £20bn “black hole” on her first day in office. They claim that previous Tory ministers were aware of this deficit but chose to ignore it. However, there may be evidence to suggest that the previous government was aware of the issue and chose not to address it. This will be a key point of contention in Monday’s announcement.
The Role of the Reserve
The Treasury has a contingency for emergencies, known as the reserve. It is possible that former Chancellor Jeremy Hunt may have planned to use this reserve to cover the shortfall. However, Labour’s stance on the reserve and how they plan to use it in the future remains to be seen.
Where Will the Cuts Come From?
Monday’s announcement will only address immediate spending cuts for the 2024/5 financial year. This may include the suspension of road projects and hospital building projects. However, more cuts are expected in the future, particularly in the welfare budget.
A One-Year Spending Review
Reeves will announce a one-year spending review to take place on the same day as the budget in October. This is a deviation from the previously planned three-year review. The decision to postpone the main spending review may be due to pressure to make quick decisions and the possibility of an upgraded growth forecast from the Office for Budget Responsibility.
Awaiting the Announcement
As the new Chancellor makes this significant announcement, the impact of this £20bn deficit and the measures taken to address it will undoubtedly have far-reaching effects on the future of Britain’s economy. Stay tuned for updates from Westminster as this story unfolds.
