Rachel Reeves’ Options for Fixing £20bn Black Hole

Chancellor Rachel Reeves will accuse Rishi Sunak’s government of “covering up” the parlous state of the public finances when she outlines Labour’s spending bill on Monday.

In a document dubbed a “guilt document”, Ms Reeves is to tell parliament that the Conservatives have left Labour with a £20 billion black hole in its accounts.

The results of a Treasury spending audit will reveal the “true scale of the damage done by the Conservatives”, a Labour source has said.

The Chancellor will also set out how Labour intends to balance the budget by delaying or cancelling a number of government spending bills.

AND took a closer look at the ways Ms Reeves could choose to plug the fiscal hole as she prepares to deliver her first look at what Labour’s autumn Budget could look like.

Tax increases

Labour repeatedly ruled out changes to VAT, national insurance and income tax during the election campaign. Ms Reeves has also indicated she does not want to increase corporation tax.

However, the chancellor is said to be considering raising capital gains tax – a tax levied on shares or other assets sold – in line with income tax. Experts say this could raise more than £16bn a year.

Another solution being pushed by Treasury officials is to cut tax breaks on pensions for many middle-class workers.

The independent Institute for Fiscal Studies (IFS) has already estimated that introducing a single 30 per cent tax on contributions could raise £2.7 billion a year.

Mrs Reeves will need to address estate taxes, and in particular whether she can recover more from inheritance tax (IHT).

The Resolution Foundation said closing loopholes to end generous IHT relief could raise £2bn a year, while former pensions minister Steve Webb said inheritance tax was one of the “most likely” areas of change for the new government.

Sources familiar with the chancellor’s thinking have previously reported, AND that tax rise options could also include ending the fuel duty freeze – raising it to £4bn a year. Fuel duty has been frozen in nominal terms since 2011 and was cut by a further 5p during the cost of living crisis.

The chancellor has not yet started the process of considering what measures to include in the Budget, which is likely to happen in October, according to government sources. She is expected to wait until after the Public Spending Audit is published on Monday.

Railway and road plans

While the Chancellor will not unveil tax changes ahead of the Budget, Ms Reeves may announce delays or cancellations to a number of key rail and road projects.

The Labour government is considering further cuts to the HS2 rail project by scrapping the Euston section, according to Sunday Times.

The removal of the central London section would mean high-speed trains would stop at a new junction at Old Oak Common on the outskirts of Acton.

Among the road projects being considered for postponement is the Lower Thames Crossing, a proposed road project that would link the M25 motorway in Essex with the M2 and A2 motorways in Kent via a tunnel under the Thames Estuary.

Ms Reeves is expected to say the Government cannot commit to building a tunnel under Stonehenge on the A303 or to plans for the proposed A27 bypass in Arundel, West Sussex.

The Chancellor will highlight the current shortfalls by abandoning major infrastructure projects and leaving Labour open to accusations of not being serious about boosting long-term growth.

Hospital construction projects

Conservative proposals to build or expand 40 hospitals could be shelved by the Labour chancellor, according to reports, after the Conservatives were accused of making little progress on their promise to deliver new facilities by 2030.

Labour health secretary Wes Streeting said last week it was “absolutely clear” the programme “cannot be delivered in that timescale”.

The New Hospital Programme (NHP) was a signature promise of Boris Johnson’s 2019 manifesto, which was repeated by Rishi Sunak after the election was called.

But the project has been thwarted by delays and Conservative accusations that it had exaggerated the help it would provide to the NHS and the number of new hospitals that would actually be built.

Meanwhile, the Chancellor is also likely to approve above-inflation pay rises for millions of public sector workers in response to recommendations from independent Pay Review Bodies.

Teachers and around 1.3 million NHS staff are set to receive a 5.5% pay rise, which could cost them around £3.5bn more than budgeted.

Economists believe this figure could rise to around £10bn if other pay review bodies made similar recommendations for workers such as police and prison officers, doctors and dentists.

Keir Starmer has previously said there would be negative economic consequences if failure to comply with pay review recommendations led to a new wave of strikes.

On Sunday, Labour’s environment secretary Steve Reed said Mr Sunak had “deliberately covered up” the state of the public finances. He told Sky News the true scale of the fallout was “catastrophic”.