Rachel Reeves acknowledged she could be forced to hike tax in her first budget, warning that “difficult decisions” would be required to address a £22 billion funding black hole.
The Chancellor took the axe to winter fuel payments for pensioners, transport projects and Tory education reforms but hinted she would have to go further in the October 30 budget.
The respected economic think tank the Institute for Fiscal Studies (IFS) warned her that “something will have to give” if she is to proceed with Labour’s own spending plans and to afford the above-inflation pay rises given to millions of public sector workers.
She ruled out raising income tax, national insurance or VAT, keeping to the commitments made in Labour’s election manifesto.
“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,” she said.
In a later press conference, she vowed to be “honest” about “more difficult decisions around spending, around welfare and around tax” because “people have been misled for too long”.
Ms Reeves accused the previous Tory government of being “dishonest” about the public finances when it pledged to cut national insurance, but promised to “stick by” Labour’s manifesto commitment not to reverse the move.
IFS director Paul Johnson said some of the details set out by Ms Reeves on the spending plans she inherited were “shocking”, although not all the spending pressures were a surprise.
“Jeremy Hunt’s £10 billion cut to national insurance looks ever less defensible.
“On asylum costs, the decision to effectively stop processing claimants, and to budget virtually nothing for the resultant costs of housing them, looks like very poor policy-making.
“The new Chancellor is right to be cross.”
But public pay recommendations were always likely to be higher than the 2% rises that had been budgeted for and the NHS often needs extra cash for the winter.
“One challenge for the Chancellor is that few of the overspends she has identified are likely to be one-off,” Mr Johnson said.
“Public sector pay increases, for example, are very much permanent.
“An extra £9.4 billion on the pay bill this year means at least that much in every year to come.
“That could be enough, when combined with Labour’s other manifesto promises around green investment, to eat up all of the so-called ‘fiscal headroom’ bequeathed to her by Jeremy Hunt.
“There will need to be some big fiscal decisions in the autumn.
“Something will have to give.
“That was true three months ago and it’s even more true now.”
The Chancellor this afternoon unveiled a £35 billion laundry list of spending pressures – more than enough to wipe out her headroom – leaving some tough choices for the Autumn Budget if she is to increase growth and bring down debt.
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James Smith, research director at the Resolution Foundation economic think tank, said Ms Reeves was facing tough choices on further tax rises or spending cuts at the autumn budget.
He said: “Any further reductions in public spending would come in the context of more than £18 billion of cuts to unprotected departments currently implied by public-finance forecasts; and any new tax rises would add to the £23 billion a year in tax increases announced, but not yet implemented, by the previous Government.”
