* Reeves to outline 20 billion pound fiscal hole on Monday
* New PM Starmer says crisis more severe than thought
* Economists say fiscal hurdles always apparent
* Conservatives say claims of a hole are ‘fabrication’
* Labour has ruled out increasing main tax rates
LONDON/RIO DE JANEIRO, July 26 (Reuters) – New British
finance minister Rachel Reeves will spell out on Monday the
scale of the public finances mess she says she has inherited,
potentially paving the way for tax rises that critics say she
could have been more candid about before the election.
Following Labour’s July 4 election victory, Reeves ordered an
assessment of public spending needs which were not fully
captured by official budget forecasts published in March.
Reeves repeatedly said the election winner would inherit the
worst set of economic circumstances since World War Two, but
ruled out raising the rates of almost all main taxes to fix
this.
Labour sources said on Friday that Reeves now expected to
reveal a 20-billion-pound ($26 billion) hole in the public
finances.
The Office for Budget Responsibility – Britain’s independent
fiscal watchdog – said in March that the previous Conservative
government’s five-year budget plans left just 8.9 billion pounds
of leeway to meet a self-imposed rule designed to stop debt
rising.
Reeves has said that – while she would rather lower taxes
than raise them – she would not make any pledges that she could
not stick to under debt rules which Labour pledged to follow.
Anticipating criticism of her assessment of the finances, Reeves
told reporters at a G20 finance leaders’ meeting in Brazil late
on Thursday that she had been frank about the need to repair
public services and stop debt rising.
“We have inherited a mess,” she said. “I’ve always been
honest that the scale of the challenge confronting this new
government is immense because of the damage done to the economy
and to public services by the Conservatives.”
Reeves declined to comment on whether the hole was 20
billion pounds or how exactly she intended to cover it before
addressing parliament.
The Conservatives immediately attacked the 20-billion-pound
figure as a prelude to unnecessary tax rises.
“Labour’s claims are nothing but a fabrication – the books
have been wide open since the OBR was set up 14 years ago,”
Conservative former finance minister Jeremy Hunt said.
POLITICAL EXERCISE
New Prime Minister Keir Starmer said on Wednesday “we have a
more severe crisis than we thought as we go through the books”
after 14 years of Conservative government, which ministers have
said impacts everything from prisons to immigration and health.
But economists and analysts said that although a finance
ministry review of spending needs might soften the political
blow from tax rises, in economic terms there were no big
surprises that Labour could not have foreseen.
Reeves herself told the Financial Times in June that Labour did
not need to win an election to find out about the bad state of
public finances.
The Labour Party’s manifesto heading into the election
spelled out small tax rises to fund specific commitments but
other fiscal details were scant, aside from a general commitment
to boost resources through higher growth.
Neither main party set out how it would meet funding shortfalls
forecast to hit the health service, and Labour accepted
Conservative fiscal plans to cut spending on some public
services which analysts had not considered tenable.
Ben Zaranko, senior research economist at the non-partisan
Institute for Fiscal Studies think tank, said Reeves’ statement
would be “a political exercise, not a genuine response to new
information”.
“I think that the fiscal challenge awaiting this government
was apparent to anyone who cared to look…. Maybe some of the
specifics are a surprise, but the overall trend was clear,” he
said. “Neither party was being fully open about the challenge.”
RED LINES
The fiscal picture is slightly worse in some areas than Labour
might have expected.
Borrowing in the three months to the end of June was 3.2
billion pounds higher than the OBR forecast in March.
Debt is the highest since the early 1960s at 99.5% of GDP,
0.8 percentage points more than forecast, while the tax burden
is already the highest since the late 1940s.
Reeves has also hinted she will accept a public-sector pay award
recommendation that teachers and health workers receive a rise
of a reported 5.5%, higher than expected.
She is set to outline that pay award on Monday too, along
with the date of the next budget.
Pantheon Macroeconomics said such a pay award would use up
almost all the fiscal headroom left over after Hunt’s March
budget.
“What’s more, we estimate that the fiscal situation has
worsened since (March),” it said.
The Labour Party has ruled out increases to the rates of income
tax, National Insurance social security payments, value-added
tax and corporation tax, tying its hands on the sources of
future tax revenue.
Former Bank of England policymaker Michael Saunders, now a
senior economic advisor at Oxford Economics, said the government
could increase taxes by between 10-25 billion pounds, and would
likely focus on inheritance tax or capital gains tax to avoid
breaking election commitments.
But while Labour’s promise not to raise specific personal
tax rates might be possible this year, the IFS’s Zaranko warned
that it would come under increasing pressure if the government
was unable to generate the growth it wants.
“Maybe eventually they’ll be forced to revisit those red
lines,” he said. “The longer the parliament goes on, I think
that it’ll be more and more difficult.”
($1 = 0.7772 pounds)
(Reporting by Alistair Smout and David Milliken in London and
David Lawder in Rio de Janeiro; Editing by Toby Chopra)
