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UK Treasury ministers have continued to soften up public opinion for a tough autumn Budget and possible tax rises, after a near £5bn overshoot in public spending led to renewed claims they have been handed a toxic legacy.
Darren Jones, Treasury chief secretary, said new public spending figures on Friday were “a clear reminder that this government has inherited the worst economic circumstances since the second world war”.
“It’s much, much worse than we thought it was going to be,” said one senior Labour official. “That’s not just a line — it’s true.” Chancellor Rachel Reeves will give a statement on Labour’s “spending inheritance” at the end of July.
Ministers this week handed to the Treasury their “bring out your dead” assessment of the spending commitments they inherited from the Conservatives and the fiscal hole they need to fill to meet them.
Rishi Sunak, former prime minister, has been scathing of what he regards as the fiscal doom-mongering and the blatant and predictable attempt by Sir Keir Starmer’s party to justify Budget tax rises in the autumn.
Labour are following a familiar path in blaming the previous government for a painful first Budget. “I understand well that the chancellor is keen to paint as bleak a picture as possible,” Sunak said last week.
While Sunak insisted the recovery was under way — with inflation at 2 per cent, unemployment at 4 per cent and the economy outstripping other G7 countries so far this year — the public finances remain in a parlous state.
The invidious inheritance was underlined by official figures showing that in the first three months of the current fiscal year public borrowing was £49.8bn, some £3.2bn higher than was predicted by the Office for Budget Responsibility in March.
The overshoot was driven in part by public spending that rose £4.7bn higher than was predicted by the fiscal watchdog. Public debt hovered at 99.5 per cent of GDP in June, near levels last seen in the early 1960s.
To underscore the problem Reeves will, on the eve of parliament’s summer recess, present MPs with an assessment of what she claims are recently discovered unfunded spending commitments.
Running in parallel, Cabinet Office minister Pat McFadden has told ministers to urgently identify problems in their departments that may be about to explode. “We’ve got to do it now and blame the Tories; otherwise we own the problem,” said one cabinet minister.
This exercise was recommended to Labour shadow ministers before the election by the Institute for Government think-tank, based on the advice of former Tory minister Justine Greening.
“What I was always quite careful to do when I arrived in departments was say: ‘Right, I want a “bring out your dead” process here’,” Greening told the IFG in a session on preparing for government.
“For the next few weeks I want to hear about the things that you’re worried about, that you think are a bit of a mess and I want them on the table so we can resolve them. What I won’t accept is six months down the line suddenly being told that something is way off-track,” she said.
The twin effects of the Reeves and McFadden reviews is to prepare the political ground for the Budget. Unless growth forecasts are upgraded, Reeves could confront a fiscal hole that she will have to fill with tax rises, spending cuts or revised fiscal rules.
But Reeves herself told the Financial Times that the OBR already went through the books, limiting the ability of incoming chancellors to discover unexpected horrors.
Sunak quoted Paul Johnson, director of the Institute for Fiscal Studies think-tank, saying: “The books are wide open, fully transparent.” Johnson said of Reeves’s review: “It will be along the lines of putting something in the public domain to show what a shambles they have inherited.”
The borrowing plans Reeves had inherited were “highly unrealistic” because they rely on implausibly tight public spending assumptions, warned Rob Wood, chief UK economist at consultancy Pantheon Macroeconomics. Reeves was aware of this problem before she entered 11 Downing Street.
Whereas former chancellor Jeremy Hunt pencilled in real-terms growth of about 1 per cent a year to overall day-to-day departmental spending, this forecast implies steep real-terms cuts exceeding 2 per cent a year in a number of unprotected Whitehall departments, such as justice.
“The new Labour government will surely top up those spending plans considerably to cover the costs of commitments on defence spending and more broadly to boost creaking public services,” Wood said.
The crisis in England and Wales’s overcrowded prisons was exposed in the first days of the Labour government, while in his first official statement as health secretary Wes Streeting said the NHS was “broken”.
Among the funding questions facing the government are how to prop up council finances after a range of local authorities in effect declared themselves insolvent, along with pressures in jails and across the health service.
With Reeves sticking to existing fiscal rules requiring public debt to fall on a five-year horizon, the Treasury was in its next Budget likely to have “limited wriggle room” beyond the £8.9bn previously estimated by the OBR, said Alex Kerr at research company Capital Economics.
“Weaker than expected borrowing so far this year will serve as a reminder to the new chancellor of the huge fiscal challenge she faces ahead of her first Budget this autumn,” said Cara Pacitti, senior economist at the Resolution Foundation think-tank.
