Reeves Hints Tax Rises Needed to Fill £22 Billion Black Hole

(Bloomberg) — Rachel Reeves announced a slew of measures to shore up the UK’s public finances as she accused the previous Conservative government of running up a £22 billion ($28.3 billion) black hole, and signaled she may have to raise taxes at the budget in the autumn to help balance the books.

Britain’s new Chancellor of the Exchequer — in office for just over three weeks — said she would stop winter fuel payments to some 10 million pensioners, cancel planned reforms to adult social care and scrap some transport projects in order to “fix the foundations” of the economy. “If we cannot afford it, we cannot do it,” she insisted in a speech to the House of Commons on Monday.

Reeves said that on taking office she had uncovered a series of public spending pressures that were left “unfunded and undisclosed” by the last Conservative administration led by former Prime Minister Rishi Sunak and former chancellor Jeremy Hunt. They included a £6.4 billion projected overspend this year on the asylum system, and another £1.6 billion in unfunded transport projects, she said. Nevertheless, she said she would meet independent recommendations for pay rises for public sector workers, with increases of five to six percentage points on average, at a cost of £9 billion this year. 

Reeves’ statement will be viewed as an attempt to roll the pitch for possible tax rises at a budget she said she would deliver on Oct. 30. Labour is trying to pin the blame squarely on the Tories for the parlous state of the national finances, after the July 4 election ended 14 years of Conservative-led governments. The budget would require “difficult decisions across spending, welfare and tax,” Reeves said, the first time she has explicitly indicated she may opt to hike more taxes.

However, the Labour government will also face questions about its own statements on the public finances and commitments on tax during the election. The scale of the challenge “has been evident for some time,” Ana Andrade and Dan Hanson at Bloomberg Economics, wrote last week, saying £20 billion needed to be found by 2028-29. 

Hunt denied he had left the black hole claimed by Reeves, describing her statement as “fictitious.” The former chancellor told the chamber that because of her access to the OBR’s analysis, as well as privileged access to the Treasury’s top civil servants in the run-up to the general election, she must have known what to expect. “Today’s exercise is not economic, it’s political,” he said, adding that she was laying the ground to make financial decisions she had planned all along.

During the campaign, Paul Johnson of the Institute of Fiscal Studies accused both parties of being complicit in a “conspiracy of silence” about the inevitable trade-offs that were coming. On Monday, he conceded the asylum overspend revealed by Reeves does appear to be unfunded, while stressing that Labour had made a choice to meet public sector pay and said the “overall challenge for spending was known.”

The Treasury published documents indicating Reeves has identified an initial £5.5 billion of savings in the current tax year, leaving pressures totaling £16.4 billion to be addressed in the budget.

To fund the pay awards, Reeves said the government will bring in means-testing for pensioners’ winter fuel payments, removing them from those who do not receive pension credit or other benefits. The chancellor also said she would ask all government departments to find savings totaling £3 billion. Still, she insisted she would not want to bring about a return to austerity measures.

The government will implement its policy to add 20% value-added tax to private school fees from Jan. 1, according to documents published by the Treasury. Tax breaks for people with non-domiciled status would be removed for income arising after Apr. 6 next year, and Britain’s energy profits levy would increase to 38% from Nov. 1, the documents said. The government also published a call for evidence on its election manifesto promise to tax the private equity industry more by treating carried interest as income rather than as a capital gain.

In its manifesto, Labour ruled out raising the headline rates of income tax, the national insurance payroll tax or value-added tax — a promise Reeves repeated on Monday. But despite saying during the campaign that there were no plans for rises in other taxes, Reeves and Prime Minister Keir Starmer stopped short of making cast-iron commitments not to hike capital gains tax or other levies on wealth, pensions and inheritance. That leaves scope for tax rises in the autumn. 

Reeves accused Sunak’s Tories of presiding over a cover-up of the extent of funding pressures facing the government, alleging they had even “exhausted” a reserve fund set aside for contingencies. “Before the election, I said we would face the worst inheritance since the Second World War,” she said, in remarks released before her statement. “But upon my arrival at the Treasury three weeks ago, it became clear that there were things I did not know,” she said, alleging Sunak and Hunt, were guilty of “covering up the true state of the public finances.”

The chancellor’s statement also leaves questions for Treasury civil servants and the Office for Budget Responsibility over their handling and oversight of the alleged overspends. In a letter published after her statement, OBR chair Richard Hughes wrote that he would launch a review of the preparation of the Departmental Expenditure Limits forecast for the fiscal outlook produced at the March budget.

Reeves also:

–With assistance from Andrew Atkinson.

(Updates with details, context, starting in sixth paragraph.)

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First Published:

29 Jul 2024, 11:17 PM IST

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