Rachel Reeves ‘planning to raise taxes and cut spending’ in October budget after large public sector pay rises
21 August 2024, 11:44
Rachel Reeves is planning to raise taxes, cut spending and clamp down on benefits in October’s budget after large public sector pay rises fulled a surge in government borrowing.
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The Treasury borrowed £3.1bn in July, according to the Office for National Statistics, well above the £0.1bn anticipated by the Office for Budget Responsibility.
The Government has borrowed £51.4bn this year so far, which is £4.7bn more than the OBR predicted.
Last month she announced she was scrapping winter fuel payments for most pensioners, shelved plans for social care reform and shelved plans for road, rail and hospital investment as part of plans to reduce borrowing costs.
Ms Reeves has accused the Tories of leaving behind a £22billion 'black hole' in public finances when they left office.
A source told the Guardian: “We don’t accept the positive economic inheritance line, given the decade that went before – but regardless, nothing in the recent data can offset the scale of the black hole in the public finances we’re looking at.”
She is reportedly considering raising inheritance tax in the Budget on Ocotber 30 - and a squeeze on public spending is also expected.
She is believed to be considering:
• Raising more money from inheritance tax and capital gains tax.
• Sticking to plans for a 1% increase in public spending even though it would involve cuts for some Whitehall departments.
• Rejecting pressure to scrap the two-child benefit cap.
• Changing the way debt is measured to exclude the Bank of England.
Last month Ms Reeves accused the previous Conservative government of leaving a £21.9 billion black hole in the public finances, through unfunded commitments that she said it had "covered up".
Chief Secretary to the Treasury Darren Jones said: "Today's figures are yet more proof of the dire inheritance left to us by the previous government.
"A £22 billion black hole in the public finances this year, a decade of economic stagnation and public debt at its highest level since the 1960s, with taxpayers' money being wasted on debt interest payments rather than on our public services."
The ONS figures showed that public sector spending of £107.4 billion last month - up £3.5 billion year-on-year - far outweighed receipts of £91 billion in what is normally a bumper month for tax revenues.
The ONS data also revealed that public sector net debt excluding state-owned banks was estimated at 99.4% of gross domestic product (GDP) at the end of July; this was 3.8 percentage points more than a year ago and remains at levels last seen in the early 1960s.
Jessica Barnaby, deputy director for public sector finances at the ONS, said: "Revenue was up on last year, with income tax receipts in particular growing strongly.
"However, this was more than offset by a rise in central Government spending where, despite a reduction in debt interest, the cost of public services and benefits continued to increase."
Government borrowing in July is usually low thanks to a surge in self-assessment tax receipts, with a record £12.9 billion being received in July.
But July's data showed soaring public spending as social benefits leaped higher due to recent inflation-linked increases.
The figures do not yet take into account the recent round of public sector pay rises announced by the Labour Government.
Ms Reeves last month ditched winter fuel allowances for 10 million pensioners as part of immediate action to address a shortfall in the public finances by £5.5 billion, with the rest of the gap to be tackled at a Budget on October 30.
Experts are warning that the latest set of borrowing figures raise the spectre of further tax rises and more borrowing to cover spending on public services.
Recent better-than-expected growth figures, which saw GDP rise by 0.6% between April and June, are not expected to soften the blow.
Isabel Stockton, senior research economist at the Institute for Fiscal Studies, said: "The early signs are that better-than-expected growth figures won't be enough save Rachel Reeves from tough choices in her first Budget on October 30.
"The combination of in-year spending pressures identified at last month's spending audit and the ongoing, and well known, pressures facing many public services suggest that the accompanying spending review for 2025-26 could be a particularly difficult exercise."
