UK scraps social care cap and fuel payments to fix £22bn fiscal hole
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The UK's chancellor of the exchequer says that the previous Conservative government had concealed the extent of the fiscal deficit.
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Rachel Reeves speaks during a press conference at the Treasury, on July 29, 2024. (AFP/Getty Images)
UK's Chancellor of the Exchequer Rachel Reeves has eliminated the social care cap and reduced winter fuel payments, alongside announcing significant cuts to hospital and road projects. She aims to address a £22 billion deficit in public spending, which she claims was "covered up" by the Conservative government.
In a Commons statement combining detailed economic explanations with partisan criticism, the chancellor defended the cuts with a repeated refrain, saying, “If we cannot afford it, we cannot do it.”
Reeves announced that the autumn budget will be presented on October 30 and cautioned that it will “involve taking difficult decisions to meet our fiscal rules across spending, welfare and tax”, hinting at potential tax increases.
To save £1 billion annually, she announced the plan to cap care charges for older people would be abandoned, which led to outcries from the Tory benches.
“I can understand why members are angry,” Reeves replied. “I am angry, too. The previous government let people down.”
She stated that the previously universal winter fuel payments for pensioners would now be limited to those with lower incomes who receive pension credits.
“Let me be clear, this is not a decision I wanted to make, nor is it the one that I expected to make, but these are the necessary and urgent decisions that I must make,” Reeves added.
She said there would also be a review of the previous government’s plan for 40 new hospitals, which would be replaced with a "thorough, realistic and costed timetable for delivery."
Reeves told MPs that while she knew in advance that Labour, if elected, would inherit a difficult fiscal position, there were a number of areas where nasty surprises had emerged.
Emergency fund already spent
Several specific budgets were "not even close" to what was needed, resulting in a "£22bn hole in the public finances now – not in the future, now – £22bn of spending this year that was covered up by the party opposite."
This included "very clear instances of specific budgets’ overspend that the Office for Budget Responsibility (OBR) was not aware of," and a £9 billion contingency fund that had already been spent three times over.
In a letter released after the statement, the head of the OBR announced a review to "assess the adequacy of the information and assurances provided to the OBR" by the then-Conservative-run Treasury before the last budget in March.
Reeves revealed that the overspend on asylum this financial year was £6.4 billion, with a £1.6 billion overspend on rail. Additionally, spending plans did not account for higher-than-target inflation or public sector pay awards above 2%.
She stated that the government would adhere to the recommendations of public sector pay review bodies, including a 22.3% pay increase over two years for junior doctors, which will add £9 billion to this year's costs.
In response, Jeremy Hunt, the shadow chancellor, argued that Reeves had complete access to government accounts and was misleading the public into believing that a fiscal black hole "has magically emerged."
“She wants to blame the last Conservative government for tax rises and project cancellations she’s been planning all along,” he said.
While Hunt cited Paul Johnson, director of the Institute for Fiscal Studies (IFS), claiming the situation was obvious to everyone, Johnson himself replied to Reeves’ statement by agreeing with her to some extent.
Johnson posted on X: “1 Last govt left public finances in bad state; 2 it does appear that funding for eg asylum was not provided but 3 c. half of spending ‘hole’ is public pay over which govt made a choice and where pressures were known; and 4 overall challenge for spending was known and remains.”
1 Last govt left public finances in bad state; 2 it does appear that funding for eg asylum was not provided
— Paul Johnson (@PJTheEconomist) July 29, 2024
but 3 c. half of spending "hole" is public pay over which govt made a choice and where pressures were known; and 4 overall challenge for spending was known and remains
To address the gap, Reeves said government departments would need to find £3 billion in savings, including cuts to consultants, communications, and back-office staff.
She mentioned £1 billion worth of unfunded transport projects would be "thoroughly reviewed," with the A303 tunnel under Stonehenge and an A27 project being canceled.
Additional savings would be achieved by abandoning the planned Advanced British Standard qualification, speeding up asylum claim processing, and avoiding the sale of government shares in Natwest at a discount to the public.
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