Bracing for Impact: Chancellor Rachel Reeves to Address £20bn Financial Shortfall with Spending Cuts and Future Tax Hikes

Critical Points to Observe as Chancellor Rachel Reeves Unveils Budget Reductions

While Labour claims to be caught off-guard by these developments – a stance somewhat justified – the revelations on Monday afternoon will significantly enhance our understanding of what lies ahead for Britain, with important insights likely hidden in the subtleties and finer details.

Assistant Political Editor @SamCoatesSky

Monday, July 29, 2024, 7:

It's likely already known to you that the new chancellor plans to inform Members of Parliament at 3:30 PM about an estimated £20 billion deficit in the government's budget. This will require urgent and harsh reductions in spending right away, setting the stage for potential tax hikes in the upcoming October budget.

Rachel Reeves and her colleagues will subsequently confront the Conservatives, questioning who was aware of the deficit and at what point. They aim to ensure that this debate resonates with the electorate as they head into the summer season.

Despite Labour's claims of being caught off-guard — claims which hold some, but not complete, merit — the developments on Monday afternoon are expected to reveal significant insights about Britain's future, offering numerous hints through subtle details and nuanced information.

Catch a Sky News exclusive broadcast of Ms. Reeves' speech starting at 3pm. You can watch it on Sky channel 501, Virgin channel 602, Freeview channel 233, stream it on the Sky News website and app, or view it on YouTube.

Here's what to keep an eye on.

What does today represent?

Ms. Reeves is set to declare that the previous Conservative administration exceeded its budget by approximately £20 billion in the financial year starting April 2024/5.

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Chancellor Rachel Reeves Set to Announce Reductions to Address a '£20bn Deficit' in Government Budget

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Subsequently, she will outline a series of immediate cost reductions that will offset a portion, though not the entirety, of the £20 billion.

Ms. Reeves has been informed that immediate measures are necessary to address the significant budget deficit, due to expected market responses. Consequently, the funding gap for the 2024/5 budget will be reduced through "extremely tough" immediate cutbacks, though it will not be completely eliminated.

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Currently, Ms. Reeves holds maximum political influence, which likely means she will face very tough decisions. It is anticipated that she will announce the budget date soon, where it is reasonable to expect that the remaining deficit will be addressed through tax hikes and additional reductions in spending.

Discover additional details on Sky News: Kemi Badenoch joins the race for Conservative leadership, aiming to succeed Rishi Sunak. Public sector employees are anticipated to receive pay increases above the rate of inflation. Plans for a debated free-speech law have been postponed due to concerns about anti-semitism.

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What will not arrive today

Looking ahead, the financial "black hole." The identified £20 billion and the yet-to-be-determined immediate reductions in spending pertain only to the 2024/2025 fiscal year. All other considerations will apply to subsequent budgets and future financial assessments.

This is significant as certain initiatives, such as the contaminated blood compensation scheme—valued at approximately £10 billion and still not budgeted for—are considered "future year problems." As such, they will not be included in Monday's report and represent a hidden challenge for the future.

Could scenarios like these require further reductions in spending or increases in taxes down the line? Today may not represent the worst of what's to come.

Observe carefully how various types of expenditures contribute to the 'black hole'

We possess a reasonable understanding of several, though not all, factors contributing to the £20 billion budget deficit.

The condition of correctional facilities is one issue, while the escalating costs of accommodating asylum seekers in hotels is another.

Additionally, as a component of the £20 billion deficit, ministers have agreed to implement the pay review body's recommendations concerning public sector wages, which includes a 5.5% raise for 450,000 teachers and a similar increase for 1.5 million NHS employees, both above the rate of inflation.

The previous Conservative government did not fully allocate funds for this, not due to any traditional "black hole" in the budget, but rather because accepting the recommendations from the pay review body is a decision driven by political considerations.

In a different reality where the Conservatives emerged victorious in the election, it's probable that a government led by Sunak would have partially rejected the recommendations from the pay body, especially if adhering to them hindered their ability to implement the tax reductions pledged in their campaign manifesto.

Certain elements within the "black hole" result from political decisions. Even when Labour was in opposition, they did not commit to unconditionally adhering to the recommendations of the pay review body. For some, this might broaden the typical understanding of what constitutes a "black hole."

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Keep an even closer eye on the figures

Reports indicate that meeting the pay review body's recommendations could run as high as £10 billion, while accommodating asylum seekers in hotels annually incurs about £4 billion. It's important to note, though, that some of these expenses may have been anticipated in budgets, so the critical concern is the financial gap that remains.

Review the initial figures. The Treasury will have completed this.

Is it fair for Reeves to claim she was caught off guard by these developments, or does the IFS have a point in asserting that she ought to have anticipated something of this nature?

The new chancellor and her colleagues are contemplating launching a counteroffensive against the Institute for Fiscal Studies, which has consistently argued that many of the reported budget overruns were foreseeable and should have been accounted for in the budget.

The think tank, similar to the Conservative Party, will argue that much of this was already clear, yet Labour chose not to delve into debates about reductions in spending or increases in taxes outside of the limited scope outlined in their manifesto. Consequently, they intentionally overlooked issues such as the crisis in prison capacity, which was apparent from weekly statistics.

Labour will contend that adjustments of this magnitude within the same fiscal year are exceedingly uncommon, and that immediate action is necessary to stabilize market confidence, as the current situation is deemed irresponsible. Mediating this discussion on Monday will prove to be quite challenging.

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If there truly exists a dire financial situation as claimed by the Labour party, what led to its development?

Labour claims that upon taking office, Ms. Reeves was immediately faced with a significant deficit, emphasizing that this issue was not uncovered through investigation but was already present from the moment she assumed her role.

Shouldn't there be concrete evidence available if Rishi Sunak and Jeremy Hunt truly engaged in severely reckless behavior regarding public finances?

Did Simon Case, the cabinet secretary, or James Bowler, the permanent secretary of the Treasury, raise the alert?

Do "ministerial directions" — official letters that challenge the spending decisions of former Conservative ministers — align with Labour's version of events to objectively demonstrate that the prior government acted as irresponsibly as Ms. Reeves claims?

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Is Mr. Hunt planning to cover the deficit using reserves?

The Treasury maintains a special provision for crises, referred to as the emergency fund.

Jeremy Hunt might have considered tapping into the reserve funds. However, what are Labour's plans for utilizing these reserves moving forward? Will they commit to a different approach? While we might not get answers on Monday, it's certainly a question to keep in mind for later.

Where will the reductions be made?

On Monday, specific reductions will be made to the current 2024/5 budgets to address the deficit within this fiscal year.

The plan will probably involve halting road developments, like the Stonehenge tunnel, and pausing the construction of Boris Johnson's 40 new hospitals. This move is expected to cause significant political upheaval and may disappoint those within their ranks who are impacted by these project cancellations. However, this is just the beginning.

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Again with the reductions? And which budget should we keep an eye on now?

Certainly. Today's budget overruns will impact subsequent fiscal periods, while some of the funding gaps will be addressed by temporary or one-time measures to increase revenue.

The full effects of the reductions will not be clear until the spending review, which is scheduled for the same day as the budget announcement.

Specifically, it's important for Labour MPs to examine the welfare budget closely, as the Treasury is concerned about its rapid expansion.

Up to this point, the rhetoric from cabinet members regarding welfare has been fairly mild—however, more stringent measures will soon be necessary to control escalating costs swiftly.

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Will a major strategic choice go almost unnoticed in the present day?

Ms. Reeves is set to announce that a spending review will coincide with the October budget.

Significantly, the assessment will now take place over one year instead of the initially contemplated three-year period just a month prior.

Essentially, Ms. Reeves will make decisions on the budget allocations for government departments soon after the party conference. However, she has avoided conducting a comprehensive three-year spending review that would span most of the current parliamentary session.

Why postpone the comprehensive three-year budget review?

This can probably be attributed to two main factors.

Firstly, a spending review ought to be an opportunity to scrutinize all expenditures made by the Tories, but with the prospect of another review in just a year, there’s less urgency to meticulously analyze each item of spending rapidly. This could lead to more sound decision-making.

Additionally, the government might confront a rather grim projection from the Office for Budget Responsibility, especially due to their choice to adopt existing fiscal policies. Postponing the primary budget review for a year allows for potential improvements in economic growth predictions, which could result in increased funds for public services.

A future settlement might turn out to be quite grim. While predictions can improve or worsen, and considering the anticipated global unrest in the near future, certainty is elusive.

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