Public sector workers are in line for a pay rise but 10 million pensioners will lose out on winter fuel payments in an attempt to fill a £22 billion black hole in the public finances, the Chancellor has announced.
Rachel Reeves said she was making “difficult decisions” as she accused the previous government of leaving £21.9 billion of unfunded commitments that it had “covered up from the country”.
In a statement to Parliament, she set out “immediate action” to address the shortfall by £5.5 billion, with the rest of the gap to be addressed at a Budget on October 30.
But her predecessor Jeremy Hunt claimed around half of the “black hole” in spending was due to her deciding to give above-inflation pay rises to millions of public sector workers.
In a hint that taxes may have to increase, Ms Reeves said: “I have to tell the House that the Budget will involve taking difficult decisions to meet our fiscal rules across spending, welfare and tax.”
She said it will be “a Budget to fix the foundations of our economy and it will be a Budget built on the principles that this new Government was elected on”.
One of the actions set out by the Chancellor on Monday involved introducing a means test for the winter fuel payment.
That policy is expected to reduce the number of pensioners in receipt of the payment by 10 million, from 11.4 million to 1.5 million, saving some £1.4 billion this financial year.
The payment is a devolved matter in Scotland and Northern Ireland.
The Government is also scrapping the Dilnot reforms to social care, which would have introduced a more generous means test and raise capital limits for individuals’ contributions to their own care.
The previous government announced the reforms in 2021, but delayed introducing them and, according to the Treasury, did not provide the required funding creating a pressure of around £1.1 billion over the next two years.
Other savings included:
– Ending the Rwanda migration scheme, saving £800 million this year;
– Cancelling the Stonehenge Tunnel, A27 schemes and plans to restore some previously closed railway lines, saving £785 million next year;
– Ending non-essential spending by departments on consultancy services and communications, saving £600 million this year;
– Abandoning Rishi Sunak’s “Advanced British Standard” in education, arguing the former prime minister “didn’t put aside a single penny to pay for it”, saving £185 million next year.
There will also be a review of other transport infrastructure projects and the New Hospitals Programme, announced by Boris Johnson with the aim of building 40 “new” hospitals.
But departments will still be expected to find a total of £3.2 billion in savings in order to part pay for above-inflation pay awards for public sector staff.
On Monday, Ms Reeves announced the Government would accept the recommendations of pay review bodies to grant millions of public sector workers pay rises of between 5% and 6%.
That decision means the Government needs to find £9.4 billion more than originally budgeted to cover the awards, one of the main pressures identified by an audit of public spending launched by Labour when it came to power.
Ms Reeves’ predecessor, Mr Hunt, said that figure meant that around half of the “fictitious black hole” comes from discretionary public sector pay awards, claiming she had “caved into the unions”.
He said: “Today’s exercise is not economic, it is political.
“She wants to blame the last Conservative government for tax rises and project cancellations she’s been planning all along.”
The Treasury stressed that failing to accept the pay review recommendations would incur additional costs as a result of continued industrial action, which it said had cost the NHS £1.7 billion last year in direct costs alone.
The Conservatives left us with the worst inheritance since the Second World War.
Today I will set out how this new Labour government will fix the foundations of our economy, so we can rebuild Britain and make every part of our country better off.
— Rachel Reeves (@RachelReevesMP) July 29, 2024
Ms Reeves defended limiting winter fuel payments to benefit recipients while hiking junior doctors’ pay by around 20% over two years.
The cancellation of appointments as a result of strikes “affects everybody in society but perhaps the oldest members of our society are affected the most”, she told a press conference at the Treasury.
“It’s the right decision in the circumstances in which we find ourselves to ensure that pension credit continues to go to the poorest pensioners.”
The Chancellor also hit back at accusations that the potential axing of infrastructure projects was anti-growth, saying: “There’s nothing pro-growth about making commitments to do things when the money simply is not there.
“If we cannot afford it, we cannot do it.”
Other significant pressures identified by the audit included £6.4 billion on hotel accommodation for asylum seekers, £2.6 billion on unfunded policy announcements since 2021 including the Advanced British Standard and the Network North scheme, and £2.2 billion needed to cover pay awards from previous years.
As stated in the Chancellor's speech, we will publish our next Economic and fiscal outlook on Wednesday 30 October 2024 alongside the Budget. pic.twitter.com/LhxsFpkiH1
— Office for Budget Responsibility (@OBR_UK) July 29, 2024
Ms Reeves said these pressures had not been revealed to the public by the previous government.
She told MPs: “Before the election, I said that we would face the worst inheritance since the Second World War.
“Taxes at a 70-year high, debt through the roof, an economy only just coming out of recession.
“I knew all of these things.
“I was honest about them during the campaign.”
But, she added there were things the Tories had “covered up from the country”.
Richard Hughes, head of the Office for Budget Responsibility, said he only became aware of the pressures “at a meeting with the Treasury last week”.
Announcing a review of the preparation of the OBR’s forecasts in March 2024, he said the findings from the Treasury audit would represent “one of the largest year-ahead overspends” outside of the pandemic.
