UK businesses say ‘worst yet to come’ after Chancellor flags spending shortfall

Business groups have said the Chancellor is right to feel “aggrieved” about the former government’s spending decisions, as she issued an “ominous warning” over potential future spending cuts and tax changes.

Rachel Reeves said she had uncovered a £22 billion shortfall in public finances, which she blamed on unfunded promises made by the Tories.

She warned that this year’s Budget, set for October 30, will involve making “difficult decisions”, hinting that some taxes may have to increase.

The former chancellor, Jeremy Hunt, responded that around half of the “fictitious black hole” in spending comes from her deciding to give pay rises to millions of public sector workers.

Business groups said the statement had clear implications for tax policy later this year.

Paul Johnson, director of the Institute for Fiscal Studies (IFS), said: “Rachel Reeves is within her rights to feel somewhat aggrieved,” adding that it is “hard to understand” why overspending was not made clear or addressed in March’s Budget.

Philip Shaw, an economist for Investec Economics, said Ms Reeves “laid the ground for some increases in other forms of taxation” such as capital gains tax and inheritance tax, as well as already confirmed VAT charges for private schools from January.

He said the Chancellor did “not launch any fireworks” on Monday, but showed the new government faces an “unsavoury choice” of public spending cuts, tax rises and higher borrowing.

Myron Jobson, senior personal finance analyst for Interactive Investor, said: “The worst may be yet to come, as the Chancellor issued an ominous warning that even more difficult decisions will be made in the Budget scheduled for the eve of Halloween.

“It is increasingly clear that a cocktail of spending cuts and tax changes could be on the cards to get the UK economy back on an even keel.”

He agreed that capital gains tax, inheritance tax and pensions could be among the areas looked at as part of efforts to plug the so-called black hole in public finances.

Meanwhile, Julian Jessop, economics fellow at the Institute of Economic Affairs (IEA), said the estimates for the size of the black hole “may be suspect”, but welcomed greater scrutiny of spending during each financial year.

“However, taking the figures at face value, the immediate savings identified will only reduce this year’s shortfall from £21.9 billion to £16.4 billion,” he said.

“This suggests that substantial tax rises in the autumn Budget will still be needed to close the gap.”