Today, the Chancellor of the Exchequer, Rachel Reeves addressed the House of Commons with a pledge to ‘restore economic stability’ after revealing a £22 billion of unfunded pressures inherited from the previous Conservative Government. This leaves the question as to what will happen with Public Finances?
Unfunded Commitments Exposed
Findings from a Treasury audit commissioned by the Chancellor has exposed billions of pounds of unfunded commitments from the previous Conservative Government, including the Rwanda scheme, the Advanced British Standard and the New Hospital Programme.
The projected overspend on the asylum system, including the Rwanda plan that Labour has now scrapped, was more than £6.5 billion for this year alone.
The previous Government also failed to increase Departmental budgets to cover public sector pay settlements, which were £11-12 billion higher than accounted for at the last Spending review. All of which were made on top of pressures resulting from higher inflation, increased asylum costs and funding for Ukraine.
Finances: Where Will These Savings Come From?
Taking immediate action, the Chancellor announced £5.5 billion of savings this year and £8.1 billion next financial year to tackle the overspend. She also committed to set out full fiscal plans, alongside a Spending Review, at the Budget on 30th October.
Other than scrapping the Rwanda plan, Labour have pledged to cancel some road and rail projects – including the tunnel under Stonehenge.
Reeves has also pledged that she will restrict how many pensioners can claim the winter fuel payment. This has received notable backlash from charity, Age UK, who claimed that they “strongly opposed” this measure.
Labour has also proposed VAT on private school fees to start in the New Year. Any fees paid from today for the term in the New Year will be subject to the additional tax, removing the possibility of parents paying in advance to reduce costs. Additionally, Reeves has abandoned the former promises made by the previous Government on adult social care.
Responses from Other Parties
As this was predominantly an attack on and attempt to hold the former Tory Government account for mismanagement and ‘lies’, former Chancellor of the Exchequer, Jeremy Hunt, hit back claiming that Reeves is ‘shameless’ in paving the way for tax rises and October’s Budget will be “the biggest betrayal in history by a new chancellor.”
“She’s leaving taxpayers to pick up the tab.”
Jeremy Hunt, Shadow Chancellor of the Exchequer
Whilst the Chancellor has ruled out future increases in income tax, national insurance contributions, and the main rate of corporation tax, this brings into question where the remaining funds will come from.
Liberal Democrats spokesperson, Sarah Olney, expressed concern with the state of ‘chaos’ left by the Tory government and called for “urgent” investment in GPs, dentists, hospitals, and improvements in efficiencies within the NHS to help reduce waiting lists and get people back to work.
Spending: Public Sector Pay Rises and Defence
Labour has pledged to give junior doctors an inflation-busting pay rise of 22%, NHS workers and teachers a 5.5% pay rise, armed forces personnel a 6% pay increase, prison service workers a rise of 5% and the police a pay increase of 4.75%. This will amount to a total cost of £9.4 billion. This is proposed to be funded by central government, while the rest will be from within the departments from saving.
Reeves also outlined the promise to continue supporting Ukraine and eventually increase defence spending to 2.5%. She claimed that ‘we will continue to honour spending commitments to Ukraine and ensure, unlike the previous Government, that they are fully funded’.
Final Thought
The Chancellor’s address marks a significant moment in the UK’s financial landscape, emphasising the need for fiscal responsibility and transparency.
Scrapping the Rwanda plan and cancelling road and rail projects are immediate steps to cut costs, but these decisions are not without backlash. There is a pressing need to create long-term growth, scrapping capital project investment will not unlick future opportunity. Restricting winter fuel payments has particularly angered pensioner groups, and the introduction of VAT on private school fees will undoubtedly unsettle many families.
Despite the criticisms, Reeves’ pledge to fund public sector pay rises and maintain support for Ukraine shows a dedication to honouring commitments and supporting vital services. However, the question remains: will these measures be enough to restore economic stability without placing an undue burden on taxpayers?
The upcoming Budget will be crucial in detailing how these plans will be implemented and whether they will gain the necessary support to succeed.
To keep up-to-date with Chamber’s UK Fiscal Analysis, click here.