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An audit commissioned by British Chancellor Rachel Reeves has revealed an additional £21.9 billion “black hole” in the country’s already strained public finances for this financial year. In a speech to Parliament on Monday, the finance minister said the first three weeks of the Labour government in power had revealed the true extent of spending needs in the UK’s public services.
It is, in fact, plausible that closer scrutiny has uncovered a number of unresolved issues that the government could not have known about while in opposition. Reeves quoted additional pressures on spending on asylum, rail services and aid to Ukraine, along with several apparently unfunded policy announcements made by the Conservatives.
Yet Labour was well aware that it would inherit a dire financial and public service situation. When the party published its manifesto, economists and think tanks warned that it had included unrealistic cuts to unprotected departments. The Institute for Fiscal Studies warned that The party’s funding plans were based on optimistic assumptions of economic growth and uncertain revenue gains from reduced tax avoidance, but both Labour and the Conservatives sidestepped fiscal realities during the election campaign.
A considerable part of the “black hole” is down to Reeves’ decision to press ahead with recommendations from public sector pay review bodies for above-inflation pay rises, amounting to more than £9bn by 2024-25. The chancellor also confirmed an offer of a 22 per cent pay rise over two years for junior doctors. Resolving pay disputes might indeed limit the future costs of strikes, but this is another expense, along with the effects of inflation on spending commitments, that Labour should have seen coming and budgeted for.
The government has also made good on its manifesto promises. Reeves has again pledged not to increase income tax, social security or VAT, which represent a significant part of the public debt. significant participation of government revenues. That leaves the chancellor with little room for manoeuvre. The cuts to Northern Ireland contributions made by the Conservatives – in part to boost their vote – are almost equal to the size of the “black hole”.
To begin to cover the deficit, Reeves made some sensible announcements The British government has taken measures including suspending non-essential spending on consultants, reviewing social spending and accelerating efficiency improvements. But it is regrettable that the chancellor has announced plans for cuts and delays to road and rail projects to create more space. Britain needs capital investment to support growth, which drives productivity and income growth.
However, these cuts only plugged part of the hole. This raises fears that the chancellor will opt for further cuts to infrastructure investment and tax increases in the autumn budget, which Reeves confirmed will be presented on 30 October. This includes the possibility of raising capital gains tax. Uncertainty about these taxes, or a significant increase in them, risks stifling wealth creators and undermining international competitiveness, particularly at a time when Britain is experiencing a surge in investor interest.
The government’s poor legacy, coupled with its own commitments, leaves few good options for raising revenue. As it assesses its options ahead of the autumn budget, it should prioritise revenue-raising measures that do the least damage to growth and investment. That means Labour may even have to revise some of its manifesto promises. Otherwise, the government risks falling into the same spiral that plagued the previous Conservative administration: sacrificing long-term economic growth to pay for overstretched public services.