Rachel Reeves made her first speech to parliament as the new chancellor on Monday, and vowed to plug the “black hole” in our public finances.
She revealed how an audit from the Treasury had found a ″£22bn” overspend in the country’s coffers, meaning there’s a substantial gap between the money the government thought was coming in and how much is actually being spent.
Economists have been warning for some time that the next government would need to raise taxes, cut spending or reduce commitments to save money.
But, Reeves presented this black hole as news to Labour – and pinned this squarely on the Conservatives for “covering up” this major issue, while announcing a series of spending cuts meant to plug the gap.
Labour wants to reduce the “black hole” by £5.5bn in 2024, and more than £8bn next year – but Reeves has repeatedly pledged not to raise working taxes.
So she has asked government departments to find savings totalling at least £3bn ahead of the autumn budget on October 3 and announced a range of spending cuts.
Here’s what you need to know.
1. Winter fuel payments
The chancellor will be restricting the winter fuel payment (between £100 and £300) to people on pension credits or other means-tested benefits from this year onwards.
It previously went to all pensioners.
“Let me be clear, this is not a decision I wanted to make,” Reeves said yesterday, while adding that it was the “responsible thing to do”.
Around 10 million pensioners and seven million pensioner households will now lose their payments.
This should raise £1.4bn for the government.
2. Public sector pay rises
Independent pay review bodies have suggested around a 5.5% pay rise for all public sector workers – and that has been accepted in “full” by the government.
Reeves said it meant “giving hardworking staff the pay rise they deserve”.
Police get a pay rise of 4.75%, prison service workers 5%, NHS workers and teachers will get a 5.5% pay rise and armed forces personnel 6%.
Junior doctors will see a 22.3% pay rise over the next two years, putting an end to the long-running strike action which Reeves claimed cost the taxpayer £1.7bn in the last year.
All these pay rises will cost £9.4bn, two thirds of which will be funded by centrals government, and the rest will come from within departments’ savings.
The government does not think this will increase inflation.
3. Private school fees VAT
VAT at the rate of 20% will be added to private school fees from January 1, 2025.
Any fees paid from today for the new year’s term will also be subjected to extra tax.
4. Spending projects and extra consultants scrapped
Reeves will ask departments to find £3bn worth of cuts in “non-essential” spending.
On top of that, Labour are dropping several projects announced by the Tories including ”£1bn of unfunded transport projects”.
Here’s what has been dropped:
a. Rwanda scheme – The Tories spent £700m on the plan to deport “illegal” asylum seekers and had planned to spend up to £10bn, Reeves claimed
b. The government’s share in NatWest – Labour will not sell it to the general public, because it would not “represent value for money”
c. A Stonehenge road tunnel on the A303 – Labour are dropping this plan completely
d. Restoring the railway fund – Labour say this will save £85m
e. A27 Arundel bypass – Labour said this was estimated to cost at least £320m
f. External consultants – Labour will reduce the number of firms paid to advise the government
g. Advanced British Standard qualification – Rishi Sunak had wanted to introduce this instead of A-levels
h. £150m investment opportunity fund – Labour say there was never any more put aside for this
i. New hospitals – Boris Johnson’s plan to build 40 new hospitals by 2030 was also put on ice, with a review into the costs planned.
5. Anti-corruption probe
Reeves is appointing a Covid corruption commissioner to take money back from contract fraud from during the pandemic.
She told Labour there is at least £2.6bn of “lost” public funds to recover.