Rachel Reeves said she would not shy away from difficult choices as chancellor and, in her first major intervention, she was as good as her word.
She announced spending cuts that will make some of her own MPs wince afterwards revealing funding deficiencies which surprised economists.
Reeves says the “public expenditure audit” was a response to a £22 billion hole in the public finances discovered in her first days at the Treasury, a “mess” left by her predecessor that she could not have known about.
She spoke of the need to “level” the public.
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Jeremy Hunt and his small group of colleagues on the opposition benches say, however, that this was the deeply political act of a new chancellor laying the groundwork for tax rises that she would not discuss before the election.
Mrs Reeves is right when she says that public finances are deeply strained. There was a funding gap of £87 billion in 2024-25, even before today’s figures, growth is tepid and the Treasury’s reserves of just over £9 billion could be spent several times over, through costs growing and unfunded political commitments.
The immigration system is running £6.4 billion over budget, largely due to rising hotel bills for migrants whose claims have not been processed pending the now-scrapped plan for Rwanda.
She is also right that the last government made political announcements without allocating funding.
Existing pay arrangements for public sector workers, the NHS workforce plan, social care reform and even Rishi Sunak’s pet education project, the Advanced British Standard, aimed at replacing the A -Levels, were plans without money to pay them.
And it is also true that in some of these areas, specifically overspending in the current financial year as opposed to long-term budget plans, she could not have known before taking power.
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Under current rules, Treasury officials cannot inform the opposition about spending pressures, and the Office for Budgetary Responsibility is sufficiently concerned about what it was told by the previous government to launch a review of the process around the last budget .
Its chairman, Richard Hughes, described it as potentially “one of the biggest overspends for next year… outside of pandemic years”.
However, a large proportion of the “overspend”, around £9.4 billion, is the result of a clear choice by Mrs Reeves to accept the recommendations of pay review bodies to increase the salaries of nurses, teachers , prison officers and police by around 5%. .
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Reeves and Treasury officials say the alternative would be more industrial measures, which have already cost the NHS £1.5 billion this year, and risk widening the pay gap in the private sector and making it harder to recruit and retain staff. guys.
They also point to last year’s pay deal agreed by the Conservatives at an average of 6%, with just 3% set aside to pay it in the departmental budget, a £2.2 billion shortfall carried over to this year.
In response, the chancellor made cuts that were notable for not having been mentioned in the Labor manifesto.
There are good arguments for means-tested winter fuel payments worth up to £300 to 11.4 million pensioners regardless of their income, but these were not made during the six-week, 10 million campaign. of people will not receive it now.
Social care reform has also been dealt a blow, with Sir Andrew Dillnot’s thoughtful and plausible reforms, first commissioned more than a decade ago by David Cameron, finally scrapped.
Due to the £1bn cost next year, the Treasury says it was unfunded and unaffordable.
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Boris Johnson’s 40 hospital plan, always a feat of imagination, has also been effectively scrapped by a review, as has a public sale of shares in NatWest and the Stonehenge tunnel, which will delight campaigners.
Even after all this, there is still £16.4 billion in spending pressures to take into account, and although the Chancellor is non-committal on details, it is clear that tax rises will be part of the response.
That process will be more formal than today’s events, with a multi-year spending review to be published next spring, the first year of which will be revealed alongside the budget on October 30.
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