In her first major intervention as chancellor, Rachel Reeves made it clear that she will not shy away from difficult decisions. Reeves announced significant spending cuts in response to a £22 billion shortfall in public finances, which she claims was left behind by her predecessor. This gap was discovered in her early days at the Treasury and was described by Reeves as a “mess” that she could not have foreseen.
Speaking to the public, Reeves emphasized the need for transparency and honesty, stating that the current state of the public finances is deeply concerning. The funding deficit for 2024-25 was already at £87 billion before the recent figures were released, and the Treasury’s reserves of just over £9 billion could be depleted multiple times due to increasing costs and unfunded policy commitments.
On the opposition benches, Jeremy Hunt and his colleagues accused Reeves of using this announcement as a political move to lay the groundwork for tax increases that were not discussed prior to the election. However, Reeves argues that the previous government failed to allocate funds for various policy announcements, leading to the current financial strain.
One of the main factors contributing to the spending cuts is the immigration system, which is running £6.4 billion over budget. This is largely due to the rising cost of housing migrants while their claims were being processed under the now-abandoned Rwanda plan. Additionally, Reeves points out that the last government made several policy announcements without providing the necessary funding. This includes the NHS workforce plan, social care reform, and Rishi Sunak’s education project, the Advanced British Standard.
Reeves acknowledges that she may not have been aware of all the spending pressures when she took on the role of chancellor. According to current rules, Treasury officials are not allowed to inform the opposition of potential spending issues. The Office for Budget Responsibility is now conducting a review into the process surrounding the previous budget, as its chair Richard Hughes believes there may have been one of the largest year-ahead overspends in recent years.
However, a significant portion of the overspending, around £9.4 billion, is a result of Reeves’ decision to accept recommendations from pay review bodies to increase the salaries of nurses, teachers, prison officers, and police officers by approximately 5%. Reeves and Treasury officials argue that not meeting these demands could lead to further industrial action, which has already cost the NHS £1.5 billion this year. It could also worsen the gap between public and private sector pay, making it more challenging to recruit and retain staff.
Despite the announced spending cuts, there is still a remaining £16.4 billion in spending pressures. While Reeves did not provide specific details, it is evident that tax increases will play a role in addressing this gap. This process will be more formal and will involve a multi-year spending review to be published next spring, with the first year’s budget being revealed alongside the budget on 30 October.
During today’s events, Reeves also made cuts that were not mentioned in Labour’s manifesto, such as means-testing winter fuel payments, which were previously given to 11.4 million pensioners regardless of their income. Additionally, the long-awaited social care reform, first commissioned by David Cameron over a decade ago, has been shelved due to its estimated cost of £1 billion for the next year. Other projects, such as Boris Johnson’s 40-hospital plan and a public sale of NatWest shares, have also been effectively abandoned, along with the controversial Stonehenge tunnel.
Despite the challenging decisions, Reeves remains resolute in her commitment to addressing the current state of the public finances. She plans to continue working towards a sustainable and balanced budget in the years to come, with the ultimate goal of securing a stable and prosperous future for the country.
