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LONDON — Britain is in a total mess. That’s what the new Labour government wants to hammer home as it makes the case for the “tough decisions” it says are needed.
In a piece of political theater Monday, the newly elected U.K. Chancellor Rachel Reeves tried to bury her Tory opponents’ economic record with a dire dossier of unfunded spending commitments and hidden horrors. The Conservatives, licking their wounds from an election rout, say she’s merely buttering up the country for tax rises.
Speaking in the Commons Monday, a somber Reeves said that the new government has inherited a huge overspend from the previous government — and pointed to a number of current spending commitments that she said are not accounted for in planned spending.
“Upon my arrival at the Treasury three weeks ago it became clear that there were things that I did not know, things that the party opposite covered up. Covered up from the opposition, covered up from this house, covered up from the country,” Reeves said.
“They had exhausted the reserve, and they knew that — nobody else did,” she added — to jeers of protest from the opposition Conservative benches.
To plug the gap, Labour plans to cut and scrap where it can — and make the case for tax rises in its first budget, planned for October 30.
Here are five things we learned on the day Labour declared Britain broken.
1) How bad is it?
Not great. There is a £22 billion black hole in the public finances which needs to be plugged, according to Labour.
Reeves argued that the big gap in the country’s finances is mainly down to inaccurate departmental spending by the previous government, the impacts of inflation, the invasion of Ukraine, some unfunded policies and a new public sector pay deal.
We learned that the previous administration’s Treasury department kept the Office for Budget Responsibility watchdog in the dark by refusing to do a spending plan since 2021, which also meant departmental spending was way out, leading to departments overspending while also seeing their budgets slashed. Labour also accused the previous government of using its reserve (£9.2 billion) several times to fund policies when they shouldn’t have.
The spending watchdog, the OBR, and the nonpartisan think tank the Institute for Fiscal Studies have backed Reeves’ claims so far, but she has fudged the numbers somewhat.
Included in the £22 billion hole is a £9.4 billion pay rise to public sector workers, which Labour agreed to do after the election and, as the Tories pointed out, was the now-government’s choice. The previous government refused a pay deal, so Labour argues that the blame can be laid at their feet too. Also assistance to Ukraine cost £3 billion this year, and Covid-19 led to a £1.6 billion bill to help rail services who lost customers before and after the pandemic.
So while Labour can point to obvious Tory failings, there are other factors leading to today’s announcement too that can’t all be laid at the previous government’s door.
This inheritance comes amid a backdrop of government debt set to hit £2.7 trillion, which is almost double what it was in the 80s, far higher even than in the aftermath of the global financial crash in 2008. Reeves needs to get debt down to stick to her fiscal rules, so this £22 billion figure isn’t a great start.
2) Public services are really, really broken
Labour can’t claim to be surprised that Britain’s public services are under strain — especially not to anyone who’s used a public service in the U.K. lately.
We already knew that the treatment backlog in Britain’s National Health Service stands at 7.6 million, and that it’s been ticking up again after a small drop earlier in Rishi Sunak’s time in office. The prisons are effectively full, something Labour made a big play of announcing in its first week of government, while a huge backlog in Britain’s courts is hampering the justice system — and that’s without mentioning huge problems across schools and the adult social care sector.
“None of this should have come as a total surprise to the chancellor,” the independent Institute for Fiscal Studies think tank wrote Monday.
“Some of it may well be a bit worse than she anticipated. There are undoubtedly things the government knows that we don’t. But there was never any doubt about the difficult inheritance awaiting her,” the think tank added.
Reeves — armed with her dossier — made the argument that while Labour knew public services were in bad shape, the government has since discovered that they’re even worse than expected. And she had examples.
The chancellor said that the last government overspent on its asylum system, including the ill-fated Rwanda deportation plan, by a projected £6.4 billion this year. “That was unfunded, and it was undisclosed,” Reeves said.
Things may get harder for the public sector. The chancellor said that she has told all government departments to find room in their non-essential budgets for a £3 billion cut this year.
Reeves also confirmed that she is ending universal winter fuel payments, which are currently paid to all pensioners. She is likely to face a fierce backlash.
3) Big infrastructure projects … scrapped
Remember Boris Johnson’s big promises to spend billions on building big infrastructure projects to spur economic growth? Those promises — or at least many of the as-yet-unfulfilled ones — have just been Reeves’d.
Reeves announced that several capital projects the government has inherited are to be delayed, or even canceled altogether.
Johnson’s wheeze to build 40 new hospitals by 2030 will be reviewed, after the new government accepted it likely wasn’t deliverable. Reeves also scrapped contentious plans for a tunnel near the Stonehenge monument, and scrapped a scheme aimed at restoring railway lines closed in the 1960s.
“If we cannot afford it, we cannot do it,” Reeves argued.
But the cuts to big infrastructure projects will make Labour’s bid for growth that bit harder — and risk angering MPs whose constituents will be affected.
4) Labour is boxed in on tax
The theater around Monday’s speech is seen by many as an attempt to roll the pitch for potential, undisclosed tax rises in October, when Reeves will deliver her first budget.
And that’s what the Tories are arguing, too.
“She will fool absolutely no one with a shameless attempt to lay the grounds for tax rises,” Tory Shadow Chancellor Jeremy Hunt said in response. He argued that Reeves was already well aware of the black hole when Labour put forward its manifesto.
In her statement, Reeves reiterated her promise not to raise taxes on “working people” — which is a reiteration of Labour’s manifesto commitment not to hike income tax, VAT or national insurance, which funds certain benefits for workers and their families.
But other tax hikes are available, such as on profits from investments or on inheritance. The trouble is, such measures won’t raise anywhere near as much dosh as hiking the three taxes Labour have ruled out raising.
“It is unwise to take important policy levers off the table before knowing which problems will need fixing,” the IFS wrote in May. “Income tax, NI and VAT collectively account for about two-thirds of total tax revenue.”
“Ruling out increases in these biggest taxes doesn’t mean that extra revenue couldn’t be raised by other means. There are other taxes. But it’s a serious constraint,” the think tank added.
It is worth remembering too that the Conservatives cut national insurance in their spring budget earlier this year — the cost of which is in the billions. With their manifesto promise not to raise NI, Labour hasn’t countenanced reversing that cut — even though it would be a big revenue raiser.
5) Go for growth
Reeves used the statement to announce the next budget will be held on October 30, with a spending review published at the same time. That’s when the chancellor’s promised focus on growing the U.K. economy to cure some of Britain’s ills comes to a head.
It won’t be easy. Reeves is relying on policies like her National Wealth Fund, GB Energy, planning reforms and her pensions and investment review to get billions of private investment flowing into the U.K. economy to boost infrastructure, pension pots and bank accounts — and growth.
Economic growth is set to hit 0.7 percent this year, and 1.5 percent next, according to the International Monetary Fund — an improvement on what came before but still but nothing to write home about.
To achieve many of the Labour government’s aims Reeves needs to see growth at a level that will actually change the U.K.’s fortunes. But U.K. growth has been sluggish since the financial crisis — 1.3 percent in 2010, 2.1 percent in 2011 and 2.4 percent in 2012.
There’s lots to be done, and not a lot of time to do it.
