Chancellor Rachel Reeves is preparing to disclose a £19bn shortfall in the public finances, laying the groundwork for an anticipated autumn tax increase.
This announcement comes as she assesses the fiscal challenges inherited from the previous Conservative administration.
According to Whitehall sources, an early audit has identified approximately £19bn in “excess pressures” for the 2024-25 financial year. These pressures include the need for higher public sector wages, as Reeves is expected to approve several inflation-adjusted pay agreements.
The financial assessment, due to be presented in Parliament next Monday, will include a detailed report on the state of public finances from every department. Reeves is also expected to announce the date of her first Budget on the same day. The Treasury will publish an unembellished evaluation based on the latest departmental figures.
A Whitehall source noted, “They aren’t simple calculations because a lot of departments are making lots of different assumptions.”
Policy experts have anticipated Reeves’ announcement for several months, though during the general election campaign, Labour avoided detailed discussions of the fiscal challenges they would face in power. Sources indicate that the exact figure for the financial gap is still being finalised and could be adjusted through efficiency savings or by delaying or restricting certain projects.
Experts have warned that the Chancellor might need to raise taxes by up to £25bn this autumn to mitigate the significant spending pressures left by her Conservative predecessor, Jeremy Hunt. Reeves will determine how to address the £19bn shortfall as she reviews public spending with Treasury officials in preparation for the Budget.
Labour leader Sir Keir Starmer has vowed there will be no return to austerity, referencing the severe cuts implemented by George Osborne when the Coalition took power in 2010. Any permanent spending increases will impact the Chancellor’s ability to meet fiscal rules, which require debt as a share of national income to be falling by the next general election.
Despite the difficult decisions ahead, Reeves is expected to approve several above-inflation pay deals next week to avoid further strikes by public sector workers. Officials are currently examining what expenses can be absorbed within existing budgets.
One former Whitehall official explained, “Departments routinely overbid and then underspend billions of pounds. Then programmes get delayed or undersubscribed so payments aren’t needed. And departments do find efficiency savings if pushed by the Treasury. Reeves could also make an active choice to delay or restrict something.”
The scale of tax increases in the Budget will also depend on the economic outlook provided by the Office for Budget Responsibility (OBR) in the weeks leading up to it. During the general election campaign, Labour pledged not to raise income tax, national insurance, or VAT. However, there are concerns that the party may consider changes to pensions or inheritance tax reliefs.
Sir Keir Starmer has hinted at the possibility of higher taxes, citing a more severe financial crisis than initially expected. Business Secretary Jonathan Reynolds has claimed that key pledges made by the previous government were not properly accounted for in departmental budgets. He noted that some funds for these commitments were drawn from a £9.2bn Treasury reserve, typically used for unforeseen spending pressures.
Reeves signalled last week that she was prepared to approve pay rises of up to 5.5% for millions of public sector workers, despite inflation being at 2%. This exceeds the current 3% plans, but is deemed necessary to prevent further industrial action from doctors and teachers. It is rare for ministers to disregard the recommendations of pay review bodies.
The OBR has highlighted that central government spending this year is already £4.7bn above its March forecast, while tax receipts have fallen short. The International Monetary Fund (IMF) warned in May that the Chancellor would need to implement £30bn of spending cuts or tax increases to stabilise the debt burden, as current spending plans of 1% above inflation were deemed unrealistic.
An HM Treasury spokesman stated, “The Chancellor has commissioned officials to provide an assessment of the state of the government’s spending inheritance, which will be presented to Parliament before the summer recess.”
