Rachel Reeves is expected to reveal a £20bn hole in government spending for essential public services on Monday, paving the way for potential tax rises in the autumn budget.
Labour sources said the blame lay with the Tory government, describing it as a “shocking inheritance” and accusing the former chancellor of “presiding over a black hole and still campaigning for tax cuts”.
They pointed to spending concerns on the asylum system, welfare, defence and prisons. However, work is still being done on the audit and the final figure of £20bn could shift as officials examine the spending commitments of each department.
When Reeves sets out the findings of her Treasury audit on Monday, she will also announce the date of the spending review and the budget in October.
Experts expect she will be forced to announce tax changes in the budget, with options including capital gains or inheritance taxes and slashing other tax reliefs. Reeves has ruled out changes to income tax, VAT, national insurance and corporation tax – the largest revenue raisers.
The prime minister, Keir Starmer, told business leaders this week that the public finances were “in the worst place since the second world war”.
A Labour source said: “On Monday, the British public are finally going to see the true scale of the damage the Conservatives have done to the public finances.
“They spent taxpayers’ money like no tomorrow because they knew someone else would have to pick up the bill. It now falls to Labour to fix the foundations of our economy and that work has already begun.”
Economists have predicted Reeves will “kitchen sink” the bad news about the economy, in an expected excoriation of the previous government’s record. The review is likely to conclude that existing spending plans are unsustainable and would require substantial cuts to public services, a position that economists had highlighted repeatedly before the election.
Presenting her Treasury audit to the Commons on Monday, the chancellor is expected to say her review has revealed state and privatised services at risk of collapse under current plans.
Further billions are also committed in schemes like compensation for victims of the infected blood scandal and of the Horizon failures at the Post Office. The Cabinet Office minister, Nick Thomas-Symonds, told the House of Commons on Thursday that final compensation payments to patients infected with contaminated blood products and bereaved partners will begin to be made by the end of this year.
On Monday, Reeves will also set out the government’s response to the public sector pay recommendations, which are about 3% higher than in current spending plans. Government sources have suggested she is minded to accept the independent pay bodies’ recommendations in full – a symbol of a new government approach – due to the costs of provoking potential further industrial action.
The former chancellor Jeremy Hunt is said to have believed that pay demands would have eaten all of the Conservative’s government fiscal headroom – one of the key reasons for Rishi Sunak calling an early election as it became clear there could be no promised tax cuts.
Reeves is expected to make it explicit that she believes her predecessor deliberately did not act to address the looming spending shortfall. “Jeremy Hunt is going to have a lot of explaining to do,” said one source.
She will not make any references to the potential remedies to the state of the economy in her speech on Monday but frame it as the first in a two-stage process that will be followed in the October budget with work kicked off by the Office for Budget Responsibility.
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The economist Michael Saunders, a former external member of the Bank of England’s monetary policy committee, said that the Reeves review could be used to “justify significant extra tax hikes, perhaps an extra £10bn-£25bn”.
He said in a report this week: “We suspect the Reeves review will conclude that a more realistic and sustainable outlook is likely to require a mix of higher public spending, greater headroom versus the fiscal rules and a more plausible path of fiscal tightening over the five-year forecast period.
“Any political costs from higher taxes could be outweighed by the scale of Labour’s majority and, using the cover of the review, putting the blame on the weak fiscal position left by the previous Conservative government.”
Tax-raising options on offer to Reeves include generating about £3bn a year, according to the Institute for Fiscal Studies, by limiting inheritance tax relief on agricultural and business assets, bringing pension pots within inheritance tax and removing the capital gains uplift on inherited assets
But the targeting of inheritance assets or pensions savings in particular is extremely contentious and is likely to draw heavy criticism from the Conservatives.
As well as setting out the major gaps in public spending projections, which experts had already said were likely to require austerity-level cuts, Reeves will highlight wasted opportunities for growth, including planning and investment.
The communities secretary, Angela Rayner, is expected to follow Reeves on Tuesday with Labour’s proposals to change national planning rules, including new targets for local authorities and relaxing rules on building on parts of the greenbelt. Those will go out for consultation before recess with the aim of approval by the end of the autumn.
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