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UK chancellor Rachel Reeves is to target a fiscal hole of about £40bn in her Budget this month — far bigger than previously expected — as she looks to patch up the NHS and Britain’s ailing public services.
The number points to larger-than-expected tax rises, welfare cuts or spending reductions in the October 30 Budget as Reeves seeks to meet her “golden rule” of balancing day-to-day spending with tax revenues.
“Just to fill the £22bn black hole that we’ve identified would mean public services just about standing still,” said one government insider, adding that Reeves was determined to inject cash into the NHS.
Reeves will also add a fiscal buffer against her “golden rule”, adding billions of pounds to the total required. The Financial Times has been told by officials close to the Budget process that the combined total would be about £40bn. The Treasury did not immediately respond to a request for comment.
Jeremy Hunt, her Conservative predecessor, left £8.9bn of headroom against his own fiscal rule, but the new chancellor is likely to target a bigger amount of spare budgetary wriggle room given she is at the beginning of a five-year parliament.
Reeves briefed cabinet colleagues on her Budget thinking on Tuesday, ahead of submitting her final proposals to the Office for Budget Responsibility, the fiscal watchdog, on Wednesday.
She is understood to have told cabinet: “The Budget will be about protecting working people, starting to fix the NHS and rebuilding Britain. We cannot turn around 14 years of damage in one Budget, but we can start to deliver on our promise of change.”
The Institute for Fiscal Studies said this week she would need to raise £25bn in tax if it wanted to boost spending increases to a rate that was in line with the growth of the overall economy — far higher than current plans.
But Reeves has privately warned the £22bn black hole the Treasury unearthed in the current fiscal year will be an enduring one that will have to be tackled in the upcoming budget, adding to the pressure of beefing up public spending in future years.
In addition, the chancellor will want to build up a buffer against her fiscal “golden rule”, which requires her to balance current spending by the end of the five-year forecast period, rather than meeting it by a whisker as implied by the IFS number.
Labour also needs to meet manifesto spending pledges while raising enough funding via tax rises or welfare cuts to bolster budgets of government departments, many of which are facing real-terms cuts.
At a one hour cabinet meeting on Tuesday Reeves spelt out her “difficult inheritance” but crucially said she hoped to find extra money for the NHS.
“If we are having to raise taxes, we want to put the money into the people’s priorities,” said one ally of the chancellor. “The NHS is the number one priority.”
Sir Keir Starmer, prime minister, again on Tuesday refused to rule out an increase in employer national insurance contributions, a tax on business which could raise billions of pounds.
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