Rachel Reeves is Set to Announce Major Cuts to Address Budget Shortfall

The Chancellor of the Exchequer, Rachel Reeves, is poised to announce significant budget cuts amounting to billions of pounds to address a substantial shortfall in public finances.

This announcement, expected on Monday in Parliament, will include the cancellation of various infrastructure projects, a reduction in expenditure on external consultants, and initiatives to cut public sector waste.

Rachel Reeves is anticipated to criticize the previous government for "covering up" budgetary shortfalls and then "running away" from the problem. In contrast, the Conservative Party has accused Reeves of attempting to "con the British public" to justify potential future tax increases.

An internal Treasury audit, scheduled for release on Monday, is projected to reveal an additional £20 billion gap between tax revenues and anticipated spending. Reeves will assert that this situation necessitates "immediate action" to restore economic stability and "fix the foundations of our economy."

Among the projects that may be paused or canceled are the road tunnel under the Stonehenge World Heritage site and Boris Johnson’s New Hospital programme. Before the recent election, leading economists had warned that the new government would face a tough choice between raising taxes, cutting spending, or abandoning commitments to reduce debt in the medium term. However, the incoming government has described the financial situation as even worse than expected, labeling it "catastrophic" after discovering additional fiscal demands during a detailed review of departmental accounts.

Reeves has expressed genuine shock at some of the findings, although she will not suggest tax increases at this stage. Instead, she will invite the Office for Budget Responsibility to assess the public finances and initiate a Spending Review to evaluate long-term departmental budgets. Annual budgets or similar fiscal events will be implemented, with Reeves expected to schedule her first budget in the autumn.

Insiders indicate that had Reeves intended to raise taxes, she would have convened an emergency budget this week. Instead, she will reaffirm manifesto commitments to not increase personal tax rates, including income tax. Pat McFadden, Chancellor of the Duchy of Lancaster, emphasized that Monday's announcement would focus on "tough spending decisions."

Michael Saunders, a senior adviser at Oxford Economics, anticipates a stringent squeeze on public spending, although less severe than some expect, coupled with significant tax rises. Saunders believes Reeves will likely highlight examples of unfunded or underfunded projects that are over budget or behind schedule to underscore the severity of the public finance situation.

Additionally, Reeves is expected to announce pay rises for some public sector workers in line with recommendations from independent pay review bodies. This would result in above-inflation settlements for teachers, armed forces members, and prison staff, among others, but would also necessitate finding funds to cover these costs. Reeves reportedly believes the cost of funding these pay deals should be weighed against the economic disruption from strikes and the challenges in recruiting and retaining staff.

A new “Office of Value for Money” will also be established to identify and recommend savings, including in the current financial year, ensuring "poor value spending is cut off before it begins."

The Home Secretary, Yvette Cooper, recently revealed that the Conservative government's plan to relocate asylum seekers to Rwanda had cost taxpayers £700 million, nearly double the previously disclosed amount. Other departments have also identified previously uncovered spending needs. For instance, Environment Secretary Steve Reed disclosed that the condition of flood defenses was "far worse than we were led to believe."

The Conservative Party has contested the new government’s portrayal of the public finances, insisting that the fiscal situation was transparent before the election. Former Conservative Chancellor Jeremy Hunt accused the new administration of "peddling nonsense," asserting that the economy was healthy and growing. Shadow Transport Secretary Helen Whately reiterated this view, stating that Labour inherited a strong economy with historically low unemployment, positioning them favorably. She suggested that Labour is setting a narrative to justify future tax increases.

Rachel Reeves' announcement on Monday will be closely watched as it sets the tone for the new government's fiscal policy and its approach to managing the current economic challenges. With the unveiling of the Treasury audit and the initiation of the Spending Review, the government aims to take decisive steps to restore confidence in the UK’s economic stability and address the pressing budgetary shortfall.