(Bloomberg) -- Chancellor of the Exchequer Rachel Reeves said she has inherited a “mess” in Britain’s public finances from the previous Conservative administration, her latest warning about the UK’s fiscal position that suggests a tax-raising Budget in the autumn.
“I am going to fix the mess that the Tories have left us,” Reeves told reporters Thursday on the sidelines of a gathering of finance chiefs from the Group of 20 in Rio de Janeiro. “I’ve always been honest that the scale of the challenge confronting this new government is immense.”
Reeves’ comments come ahead of an update on the state of Britain’s finances she plans to present in Parliament on Monday, a key moment when she’s expected to detail a near £20 billion funding shortfall for public services. Reeves, who became Chancellor after Labour’s crushing election victory on July 4, told Bloomberg earlier this month she plans to “level” with the public about “difficult decisions” ahead.
Asked whether she still had “no plans” to raise taxes on wealth, property or inheritance in Britain, as Labour repeatedly said during the election campaign, Reeves did not reiterate that commitment.
“We set out our tax promises in the manifesto not to increase income tax, national insurance or VAT for the duration of the next Parliament,” she said. “I will always make sure the sums add up.”
The new prime minister, Keir Starmer, and Reeves must confront difficult choices on taxes and spending after the previous Tory government left public finances in a fragile position. Former Chancellor Jeremy Hunt was hitting the UK’s key fiscal target — to see debt, measured as a share of the economy, falling within five years — with just £8.9 billion to spare in the last Budget in March, a margin near historic lows.
Hunt’s plan meant that any downgrade to Britain’s growth forecasts would likely require tax hikes or spending cuts in the next Budget to hit the key fiscal rule. Economists have been predicting the Office for Budget Responsibility’s growth assumptions will indeed be revised lower for Reeves’ Budget in the autumn.
Hunt had also assumed a mere 1% increase in departmental spending in real terms in the coming years, a plan the International Monetary Fund said wouldn’t be enough to fix Britain’s crumbling public services. A major Labour pledge during the election campaign was also not to return to austerity in public spending.
Reeves and Starmer also face pressure on public sector pay. Britain’s independent pay review bodies have recommended salary increases of 5.5% for teachers and National Health Service staff, compared to increases of 3% for which the government had previously budgeted.
Because of the various spending pressures and fragile position, Reeves could use her review of the fiscal inheritance to justify tax increases of up to £25 billion, according to former Bank of England policymaker Michael Saunders. Nevertheless, Reeves said her ambition is still ultimately to reduce the tax burden.
“I want taxes to be lower, not higher, but I’m not going to make any commitments without being able to say where the money is going to come from,” she said. “We’ve got set fiscal rules and those fiscal rules are non-negotiable.”
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