In a speech to the House of Commons, Chancellor of the Exchequer Rachel Reeves committed to making "difficult decisions" to restore economic stability after unveiling £22 billion of unfunded commitments left by the previous government. This significant announcement, which included plans to find substantial savings and set strict fiscal rules, marks a pivotal moment for the current administration as it seeks to rectify the financial challenges inherited from its predecessors.
Before the speech, there was criticism that Labour had access to the country’s books before the election and that this was a political exercise intended to allow the new government to increase taxes. However, the Chancellor's position was supported by a letter from Office for Budget Responsibility (OBR) Chair Richard Hughes, who stated that the previous government had overseen “one of the largest year-ahead overspends” in recent memory. The budgetary watchdog has announced plans to investigate Hunt’s earlier spending forecasts.
The findings from a Treasury audit commissioned by Chancellor Reeves revealed a multitude of unfunded pledges from the previous government, such as the Rwanda scheme, the Advanced British Standard, and the Conservatives 2019 New Hospital Programme. These, combined with unaccounted public sector pay settlements and rising costs due to inflation and increased asylum expenditures, have contributed to substantial financial pressure.
In response, the Chancellor announced immediate savings of £5.5 billion for this year and £8.1 billion for the next, to address the overspend. The Chancellor emphasised the necessity of these measures, stating, "This is not the statement I wanted to give today, and these are not the decisions I wanted to make. But they are the right decisions in difficult circumstances."
Significant savings will be achieved by halting the previous government's unfunded adult social care charging reforms, saving over £1 billion next year and over £4 billion by 2029-30. Additionally, around £1.5 billion per year will be saved by targeting Winter Fuel Payments to households receiving specific means-tested benefits, ensuring support is directed to those most in need.
However, this decision to restrict Winter Fuel Payments has drawn significant criticism. Many argue that this change will adversely affect millions of pensioners who do not qualify for means-tested benefits but still struggle with heating costs. Age UK expressed concerns that the changes would mean 2 million pensioners who “badly need the money” will lose the yearly payment of up to £300. Personal finance expert Martin Lewis also criticised the move, stating that the payment is restricted to “too narrow a group.” This criticism underscores the challenge of balancing fiscal responsibility with social welfare needs.
Reeves reaffirmed Labour's manifesto promises, stating her intention not to raise taxes for working people and "stands by" the pledge to avoid increasing National Insurance, income tax, or VAT. The Chancellor's plan includes scrapping the Rwanda migration partnership and the retrospection of the Illegal Migration Act, saving £800 million this year and £1.4 billion next year. Other immediate savings involve cancelling the Investment Opportunity Fund, various small projects, the Advanced British Standard, and unaffordable road and railway schemes, including the tunnel under Stonehenge.
To provide stability for public sector workers and reduce strike actions, the Chancellor accepted the independent Pay Review Body's recommendations, confirming an average pay uplift of 5.5% for public sector workers. Additionally, a 22% two-year pay offer has been made to junior doctors to prevent further strikes in the NHS. This has been considered controversial, partially due to the cut in winter fuel payments. Further, many junior doctors are unhappy with the offer.
To ensure long-term financial stability, the Chancellor announced plans to conduct Spending Reviews every two years, covering three years with a one-year overlap, enhancing certainty over public finances. Increased transparency regarding in-year spending pressures will be provided to the OBR, and the government will commit to a single major fiscal event each year.
The Chancellor also outlined measures to tackle welfare fraud, improve public sector productivity, and establish a new Office of Value for Money. Key tax policies to be confirmed at the Budget on 30th October include ending VAT tax breaks for private schools from January 2025 and replacing the non-domicile regime with a new internationally competitive residence-based regime.
The Energy Profits Levy will be extended to 31 March 2030, with tightened investment allowances and an increased rate from 35% to 38% from November 2024. Additionally, a call for evidence has been published, confirming the government's intention to address the carried interest loophole. Further updates are expected at the Budget on the 30th of October.
The opposition has criticised the Chancellor's announcement, with Shadow Chancellor Jeremy Hunt accusing Reeves of paving the way for tax rises and labelling the upcoming Budget as potentially the "biggest betrayal“ by a new chancellor. However, independent economists and the Institute for Fiscal Studies (IFS) have broadly supported the Chancellor's findings, acknowledging the significant fiscal challenges left by the previous government.