UK Treasury ministers are softening up public opinion for a tough autumn Budget and possible tax rises, after a near £5bn overshoot in public spending led to renewed claims they have been handed a toxic legacy.
Chancellor Rachel Reeves said on Sunday that she wanted to “level” with the public about Britain’s fiscal “mess”.
“Public services on their knees, a tax burden at a 70-year high, debt almost the same size as our entire economy,” she told the BBC. “It makes me pretty angry that they [the Conservatives] left the country in this sort of state . . . they’ve left us to pick up the pieces.”
Reeves will give a statement on Labour’s “spending inheritance” at the end of July.
Ministers this week handed to the Treasury their “bring out your dead” assessment of the spending commitments they inherited from the Tories and the fiscal hole they need to fill to meet them. One early challenge is finding billions of pounds to fund pay rises for public sector workers.
Former Conservative ministers have been scathing of what they regard as the fiscal doom-mongering and the blatant and predictable attempt by Sir Keir Starmer’s party to justify Budget tax rises in the autumn.
Labour is following a familiar path in blaming the previous government for a painful first Budget.
“What is absolute nonsense is this business of ‘the worst economic inheritance since the second world war’,” Jeremy Hunt, former Conservative chancellor, told the BBC on Sunday.
He insisted the Tories had handed over an economy in much better shape than when it replaced Labour in 2010, with inflation at 2 per cent, unemployment at 4 per cent and the economy outstripping other G7 countries so far this year.
“It’s a very transformed picture and I think the reason that she [Reeves] is doing this is that she wants to raise the ground for tax rises,” he said. “She should have been honest about that before the election.”
But Reeves said recent labour market data showed rises in unemployment and economic inactivity, adding: “I don’t buy this idea that somehow we’ve been handed a golden inheritance.”
Meanwhile the public finances remain in a parlous state. Official figures show that in the first three months of the current fiscal year public borrowing was £49.8bn, about £3.2bn higher than predicted by the Office for Budget Responsibility in March.
The overshoot was driven in part by public spending that rose £4.7bn higher than was predicted by the fiscal watchdog. Public debt hovered at 99.5 per cent of GDP in June, near levels last seen in the early 1960s.
Darren Jones, Treasury chief secretary, said the figures showed Labour had been bequeathed the “worst economic circumstances since the second world war”.
“It’s much, much worse than we thought it was going to be,” said one senior Labour official. “That’s not just a line — it’s true.”
To underscore the problem, Reeves will, on the eve of parliament’s summer recess, present MPs with an assessment of what she claims are recently discovered unfunded spending commitments.
“They didn’t make the tough decisions, they ran away from them, and it’s now up to us to fix it,” she said on Sunday. “There are going to be tough decisions ahead.”
Running in parallel, Cabinet Office minister Pat McFadden has told ministers to urgently identify problems in their departments that may be about to explode.
“We’ve got to do it now and blame the Tories; otherwise we own the problem,” said one cabinet minister.
This exercise was recommended to Labour shadow ministers before the election by the Institute for Government think-tank, based on the advice of former Tory minister Justine Greening.
“What I was always quite careful to do when I arrived in departments was say: ‘Right, I want a “bring out your dead” process here’,” Greening told the IFG in a session on preparing for government.
“For the next few weeks I want to hear about the things that you’re worried about, that you think are a bit of a mess and I want them on the table so we can resolve them,” she said.
The twin effect of the Reeves and McFadden reviews is to prepare the political ground for the Budget. Unless growth forecasts are upgraded, Reeves could confront a fiscal hole that she will have to fill with tax rises, spending cuts or revised fiscal rules.
But Reeves told the Financial Times that the OBR already went through the books, limiting the ability of incoming chancellors to discover unexpected horrors.
Former prime minister Rishi Sunak last week quoted Paul Johnson, director of the Institute for Fiscal Studies think-tank, saying: “The books are wide open, fully transparent.” Johnson said of Reeves’s review: “It will be along the lines of putting something in the public domain to show what a shambles they have inherited.”
The borrowing plans Reeves had inherited were “highly unrealistic” because they rely on implausibly tight public spending assumptions, warned Rob Wood, chief UK economist at consultancy Pantheon Macroeconomics. Reeves was aware of this problem before she entered 11 Downing Street.
Whereas Hunt pencilled in real-terms growth of about 1 per cent a year to overall day-to-day departmental spending, this forecast implies steep real-terms cuts exceeding 2 per cent a year in a number of unprotected Whitehall departments, such as justice.
Among the funding questions facing the government are how to prop up council finances after a range of local authorities in effect declared themselves insolvent, along with pressures in jails and across the NHS.
With Reeves sticking to existing fiscal rules requiring public debt to fall on a five-year horizon, the Treasury was in its next Budget likely to have “limited wriggle room” beyond the £8.9bn previously estimated by the OBR, said Alex Kerr at research company Capital Economics.
