While Rachel Reeves laid out a fiscal inheritance that was worse than many had anticipated, tax rises are almost certainly on the way, economists and experts have said in reaction to the Chancellor’s speech today.
In the run-up to the election, a gaggle of think tanks said that the ‘books were open‘ and that the scale of the fiscal challenge was available for all to see.
But after the Chancellor’s statement on the public finances this afternoon, which laid out a £22bn blackhole in the public finances, many suggested that the new government’s fiscal inheritance was indeed worse than had been expected.
“The extent of the in-year funding pressures does genuinely appear to be greater than could be discerned from the outside,” Paul Johnson, director of the Institute for Fiscal Studies (IFS) said.
He noted that some of the specifics were “shocking”, particularly the additional £6.4bn in spending pressure that resulted from supporting asylum seekers.
In addition to the cost pressures from processing asylum seekers, the Chancellor pointed to the costs of supporting the railways over the course of the pandemic, which amounted to £2.9bn, and military support for Ukraine totalling £1.7bn.
Reeves slammed the Conservatives for their stewardship of the economy. “Some, including the Leader of the Opposition and Shadow Chancellor have claimed the books were open. How dare they,” she said in the House of Commons.
“There are very clear instances of specific budgets that were overspent and unfunded promises that were made that the OBR was not aware of for their March forecast,” she said.
Robert Colville, director of the Centre for Policy Studies (CPS), agreed that some of the costs may have been “unforeseen,” although he noted a large portion of the funding gap stemmed from large pay awards to the public sector.
The government confirmed that it had agreed new pay deals for the public sector, which will see pay increase by 5.5 per cent to the tune of £9.4bn. Junior doctors meanwhile will get a 20 per cent pay increase.
“A substantial amount of the ‘black hole’ she identified stems from her own decisions on public sector pay, in granting significant increases to teachers and NHS workers and settling with the junior doctors on extremely generous terms,” Colville said.
Johnson argued that the public sector pay deal should not have come as a “terrible surprise” to the new government given that pay growth in the private sector has been running around six per cent all year.
“Public sector pay awards were always going to come in higher than the two per cent budgeted by departments. That is a pressure that was known,” he said.
Either way, the longer term consequences of the fiscal position is that Labour is almost certainly going to have to raise taxes in the Budget, which was confirmed for 30 October.
Economists at Investec said “the Chancellor’s audit spells some tax increases at October Budget” while analysts at Capital Economics expect the Chancellor to look to raise an extra £10bn a year alongside some additional borrowing.
Colville at the CPS agreed. “The war of words between Rachel Reeves and Jeremy Hunt should not obscure the most important consequence of what we heard – that Labour is set to increase taxes at the October Budget”.