What was behind the Chancellor’s statement and are tax rises more likely?

Public sector workers are in line for a pay rise but 10 million pensioners will lose out on winter fuel payments in an attempt to fill a £22 billion black hole in the public finances, the Chancellor has announced.

Rachel Reeves said she was making “difficult decisions” as she accused the previous government of leaving £21.9 billion of unfunded commitments that it had “covered up from the country”.

In a statement to Parliament, she set out “immediate action” to address the shortfall by £5.5 billion, with the rest of the gap to be addressed at a Budget on October 30.

– Why did the Chancellor make a statement today?

An internal Treasury audit of the public finances was expected to be published on Monday.

It has identified a £22 billion “black hole” in the public finances.

Labour said this is a much larger than expected gap between tax revenues coming into the Treasury and expected spending.

Therefore, Rachel Reeves laid out how she will address the shortfall and restore economic stability and “fix the foundations of our economy”.

– What did the Chancellor say contributed to the funding shortfall?

Ms Reeves said the forecast for the number of asylum seekers had risen “dramatically” while the cost of asylum support had risen sevenfold.

This led to a projected overspend in the asylum system, including the Rwanda plan, of £6.4 billion.

She said these costs were not reflected in the Home Office budget this year, accusing the previous government of covering up the “true extent of the crisis and its spending implications”.

The Chancellor also said there was an undisclosed projected overspend in the Transport budget of £1.6 billion.

She said this was driven by industrial action and the previous government giving money to rail firms to make up for passenger shortfalls following the pandemic.

In addition, Ms Reeves accused the previous government of failing to prepare for the recommendations of independent public sector pay review bodies.

She confirmed the Government has made a 22% two-year pay offer to junior doctors while teachers and NHS staff will receive a 5.5% rise.

These settlements have an overall additional cost of £9 billion this year.

– What were the main plans announced for addressing the shortfall?

The Chancellor confirmed she had made the “difficult decision” to stop winter fuel payments for those who do not in receipt of pension credits or other means tested benefits.

“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,” Ms Reeves said.

The Government will continue to provide £200 to households receiving pension credit and £300 to those households with someone over the age of 80.

The Chancellor added that there would be an effort to maximise the take-up of pension credit by working with charities and local authorities.

As well as scrapping the Rwanda scheme, the Government has moved to remove the retrospective elements of the Illegal Migration Act.

The Chancellor said this would significantly reduce the costs of hotel accommodation for asylum seekers.

She added these asylum system measures would save nearly £800 million this year and “avoid costs spiralling even further”.

Reforms planned by the previous government to reform adult social care charges will no longer go ahead, saving a projected £1 billion by the end of next year.

The popular proposals, which included the introduction of a £85,000 cap on care costs and ensuring people retained more of their savings and assets, had been delayed by the previous government after a national insurance rise to fund the changes was scrapped.

– What other plans for savings were announced?

The Chancellor will ask all Whitehall departments to find savings ahead of the Autumn Budget.

This will include identifying non-essential spending on consultants and Government communications, and savings in back office costs.

In addition, Ms Reeves said the Government would not go ahead with the introduction of the new qualification called the “Advanced British Standard”.

This was announced by Rishi Sunak last year, but the Chancellor said the previous Government had not accounted for the £200 million cost next year.

The Chancellor also confirmed the cancellation of the “Investment Opportunity Fund”.

This was announced by Jeremy Hunt in last year’s Autumn Statement and £150 million was allocated.

The Conservative government’s plan for a retail sale of shares in NatWest will not be implemented as the Chancellor said the process would involve discounts that may cost taxpayers hundreds of millions of pounds.

– What about capital spending?

Road and rail projects have also been targeted for savings.

Proposed works on the A303 and the A27 have been cancelled, as has a program to restore railways which will save £85 million next year.

Some projects of these projects could be revived following a review by Transport Secretary Louise Haigh.

Ms Reeves said the previous government maintained its commitment to build or develop 40 hospitals despite not having “anywhere close to the funding required to deliver them”.

Therefore, the Chancellor confirmed a review of the program to establish a “thorough, realistic and costed timetable for delivery”.

– Were any longer-term measures announced?

Yes, the Chancellor confirmed the creation of an Office of Value for Money which will be tasked with identifying and recommending savings so “poor value spending is cut off before it begins”.

– How did the Opposition respond?

Shadow chancellor Jeremy Hunt claimed around half of the “black hole” in spending was due to Ms Reeves deciding to give above-inflation pay rises to millions of public sector workers.

He denied that his government had tried to mislead the public and said the Chancellor’s announcement was “not economic. It’s political”.

“She want to blame the last Conservative Government for tax rises and project cancellations she has been planning all along,” he added.

– Are tax rises now more likely?

The Chancellor repeated Labour’s manifesto commitment that taxes on working people would not increase, as she ruled out changes to national insurance, income tax or VAT.

But in a hint that taxes may have to increase, Ms Reeves said: “I have to tell the House that the Budget will involve taking difficult decisions to meet our fiscal rules across spending, welfare and tax.”

Ms Reeves has now kickstarted the process for a spending review, which will examine the departments’ budgets over the loner term, and confirmed the Autumn Budget will take place on October 30.

– What are the implications for the Autumn Budget?

The warnings of very difficult decisions ahead suggest the forthcoming Budget will clearly be riddled with challenging and politically perilous trade-offs.

Paul Johnson, director of the Institute for Fiscal Studies reversing the national insurance cuts announced by Jeremy Hunt in the last two Budgets could fill the £20 billion hole.

The general consensus is that the Government’s move to approve above-inflation pay rises in the public sector increases the likelihood of tax increases in the Autumn.

Mr Johnson said it seemed “pretty likely” that the new Government will raise taxes in some form.

“If it weren’t for the politics, that would be the most straightforward thing to do,” he told Times Radio.

The Resolution Foundation think tank said the assessment of public finances only focused on the current year, but pointed out that spending pressures such as the uplift in public sector pay will continue throughout this parliament.

It added: “The Chancellor faces a huge challenge to bring down public sector debt without cutting unprotected departmental spending by more than the £18 billion a year already pencilled in to the Government’s finances – or adding to the £23 billion a year tax rises announced by the previous government that have not come into force.”