LONDON – Britain's new Labour government axed several construction projects and withdrew a winter fuel payment for millions of retirees Monday to cover what it called a newly uncovered 22-billion-pound ($28 billion) shortfall in the public finances inherited from the previous Conservative administration.
In her first major speech as Treasury chief, Rachel Reeves accused the previous government of covering up the dire state of the nation's finances following a review of departmental spending that she commissioned three weeks ago in the wake of Labour's landslide victory.
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“They ducked the difficult decisions, they put party before country and they continued to make unfunded commitment after unfunded commitment, knowing that the money was not there, resulting in the position that we have now inherited," she said.
Reeves, the U.K.'s first female Chancellor of the Exchequer, said the audit had found several sources of excess spending pressures, with nearly half of the total identified a result of the non-accounting of upcoming pay awards in the public sector.
A 6.4 billion-pound overspend in the asylum system was also identified, partly connected with the failed plan to send migrants on a one-way journey to Rwanda. Among other commitments, Reeves said spending on the war in Ukraine had not been fully funded.
While not announcing any changes in taxes, Reeves set out a series of “difficult” savings to recoup money over the coming couple of years, including the establishment of an office to identify “wasteful spending.”
Some transportation projects where funding has yet to be determined will be axed, including a contentious plan to dig a tunnel near Stonehenge, while the previous government's new hospital program will be scrapped and replaced by one that is "thorough, realistic and costed timetable for delivery.”
Perhaps most controversially, Reeves announced that a winter payment currently going to all retirees to help pay for fuel will now be given only to those most in need. A plan to limit the costs individuals pay for their care in old age will be abandoned.
Reeves also put lawmakers on notice that there may be some tax increases when she delivers her first budget on Oct. 30. It will involve “taking difficult decisions ... across spending, welfare and tax."
Labour, back in power after 14 years, pledged during the campaign that it wouldn’t raise taxes on “working people,” saying its policies would deliver faster economic growth and generate the additional revenue needed by the government. Reeves could look to raise more revenue by other means such as closing tax loopholes, particularly on capital gains or on inheritance.
Critics, especially her predecessor Jeremy Hunt, argue that Reeves is trying to score early political points in the new Parliament, and that she knew full well the state of the public finances during the general election.
“If you’re in charge of the economy, it’s time to stop trash-talking it,” Hunt said in response to Reeves' speech. "She will fool absolutely no one with a shameless attempt to lay the grounds for tax rises that she didn’t have the courage to tell us about.”
Reeves also announced a series of pay agreements with staff in the public sector, from teachers to doctors. Most importantly, she said the government had reached agreement with unions to end the long-running strike of doctors in England in the early years of their careers. It will see so-called junior doctors getting a 22% pay increase over two years.
The Institute for Fiscal Studies, a well-respected economic think tank, had accused both main parties during the election of a “conspiracy of silence” over the scale of the financial challenges facing the next government, with the country's debt burden running at nearly 100% of national income, its highest level since the early 1960s.
But even the IFS appears to think that the situation was even worse than predicted and that Reeves is “within her rights to feel somewhat aggrieved,” especially with regard to the asylum bill.
“It was always clear and obvious that the spending plans she inherited were incompatible with Labour’s ambitions for public services, and that more cash would be required eventually,” said Paul Johnson, IFS director. “But the extent of the in-year funding pressures does genuinely appear to be greater than could be discerned from the outside, which only adds to the scale of the problem.”