Chancellor statement on public spending inheritance
Chancellor of the Exchequer Rachel Reeves statement to the House of Commons on 29/07/2024.
Mr Speaker, on my first day as Chancellor of the Exchequer, I asked Treasury officials to assess the state of public spending.
That work is now complete, and today I am presenting it to this House.
In this statement, I will do three things.
First, I will expose the scale – and the seriousness – of what has been uncovered.
Second, I will lay out the immediate action we are taking to deal with the inheritance.
And third, I will set out our longer-term plans to fix the foundations of our economy.
Let me take each of these in turn.
First, the inheritance.
Before the election, I said that we would face the worst inheritance since the Second World War.
Taxes at a seventy year high.
Debt through the roof.
An economy only just coming out of recession.
Mr Speaker, I knew all those things.
I was honest about them during the campaign.
And the difficult choices it meant.
The British people knew them too.
That is why they voted for change.
But upon my arrival at the Treasury three weeks ago, it became clear that there were things I did not know.
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That is why we are today publishing a detailed audit of the real spending situation, a copy of which will be laid in the House of Commons Library.
I want to take the opportunity to thank Treasury officials for all their work in producing this document.
Let me explain what it has uncovered.
Mr Speaker, the government published its plans for day to day departmental spending at the Spring Budget in March.
But when I arrived at the Treasury…
… on the very first day…
… I was alerted by officials that this was not how much the previous government expected to spend this year.
Not even close.
In fact, the total pressure on these budgets across a range of areas was an additional £35bn.
Once you account for the slippage in budgets you usually see over a year…
… and the reserve of £9bn to deal with genuinely unexpected events…
… it means, Mr Speaker, that I have inherited a projected overspend of £22bn.
A £22bn hole in the public finances now – not in the future.
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If left unaddressed it would have meant a 25% increase in the government’s financing needs this year, pushing gilt issuance further into record highs outside of the pandemic.
So I will today set out the urgent work I have already done to reduce that pressure on the public finances by £5.5bn this year and over £8bn next year.
And let me be clear: I am not talking about bills for future years they signed up to but did not include, like the compensation for infected blood.
I am not talking about the state of public services in the future, like the crisis in our prisons, which they have left for us to fix.
I am talking about the money they were spending this year and had no ability to pay for…
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Resulting in the position that we have now inherited:
The reserve, spent three times over only three months into the financial year.
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Mr Speaker, the scale of this overspend is not sustainable.
Not to act is simply not an option.
We have already seen official ONS figures this month showing borrowing is higher this year than the OBR expected. [Redacted political content]
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There are very clear instances of specific budgets that were overspent…
… and unfunded promises that were made…
…but that, crucially, the OBR were not aware of for their March forecast.
I will now take each of those instances in turn.
First, the asylum system.
The forecast for the number of asylum seekers has risen dramatically since the last Spending Review, and costs for asylum support have risen sevenfold in the last three years.
But instead of reflecting those costs in the Home Office budget for this year, the previous government covered up the true extent of the crisis and its spending implications.
The document I am publishing today reveals a projected overspend on the asylum system, including their failed Rwanda plan, for this year alone of more than £6.4bn.
That was unfunded and undisclosed.
Next, in the wake of the pandemic, demand for rail services fell.
But instead of developing a proper plan to adjust for this new reality, the government handed out cash to rail companies to make up for passenger shortfalls, but failed to budget for this adequately.
Because of that, and because of industrial action, there is now an overspend of £2.9bn in the transport budget.
That was unfunded and undisclosed.
Mr Speaker, since 2022, the government – with the support of this whole House – has rightly provided military assistance to Ukraine in response to the Russian invasion.
The spending audit has found that there was not enough money set aside in the reserve to fund all these costs.
We will continue to honour these commitments in full.
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On top of these new pressures, since 2021, inflation was above the Bank of England’s target for 33 months in a row – hitting 11% at its peak.
But the government has not held a Spending Review since 2021.
That means they never fully reflected the impact of inflation in departmental budgets.
This had a direct impact on budgets for public sector pay.
When the last Spending Review was conducted, it was assumed that pay awards would be 2% this year.
Ordinarily, the government is expected to give evidence to the Pay Review Bodies on affordability.
But extraordinarily, this year, the previous government provided no guidance on what could or could not be afforded to the Pay Review Bodies.
This is almost unheard of.
But that is exactly what they did.
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I will not repeat their mistakes.
Where the previous government provided no transparency to the public, and no certainty for public services…
… we will be open about the decisions which are needed…
… and the steps we are taking.
That begins with accepting in full the recommendations of the independent Pay Review Bodies, and the details of these awards are being published today.
That is the right decision for the people who work in and most importantly the people who use our public services…
… giving hardworking staff the pay rise they deserve…
… while ensuring we can recruit and retain the people we need.
It should not have taken this long to come to these decisions.
And I do not want us to be in this position again.
So, I will consider options to reform the timetable for responding to the Pay Review Bodies in the future.
This decision is in the best interests of our economy too.
The last government presided over the worst set of strikes in a generation.
This caused chaos and misery for the British public.
And it wreaked havoc on the public finances.
Industrial action in the NHS alone cost the taxpayer £1.7bn last year.
That is why I am pleased to announce today that the Government and the BMA have agreed an offer to the Junior Doctors, on which my RHF the Health Secretary will set out further details.
And let me pay tribute today to my RHF, whose leadership on this issue has paved the way to ending a dispute which has caused waiting lists to spiral, operations to be delayed and agony for patients to be prolonged.
Today marks the start of a new relationship between the government and staff working in our National Health Service – and the whole country will welcome that.
Mr Speaker, where the previous government ducked the difficult decisions, I am taking action.
Because knowing what they did about the state of the public finances, they continued to make unfunded commitment after commitment that they knew they could not afford.
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Leaving us with an overspend of £22bn this year.
Where they presided over recklessness, I will bring responsibility.
I will take immediate action.
Let me set this out in detail.
First, pay.
I have today set out our decision to meet the recommendation of the Pay Review Bodies.
Because the previous government failed to prepare for these recommendations in departmental budgets, they come at an additional cost of £9bn this year.
So, the first difficult choice I am making is to ask all departments to find savings to absorb as much of this as possible…
… totalling at least £3bn.
To support departments as they do this, I will work with them to find savings ahead of the Autumn budget…
… including through measures to stop all non-essential spending, such as on consultancy and government communications.
And I am asking departments to find 2% savings in their back-office costs.
I will now deal with a series of commitments made by the previous government which they did not fund.
Because if we cannot afford it, we cannot do it.
First, [Redacted political content] the former Prime Minister announced the introduction of a new qualification: the “Advanced British Standard”.
That is a commitment costing nearly £200m next year, rising to billions in future years.
Mr Speaker, this was supposed to be the Prime Minister’s legacy.
But it turns out, he didn’t put aside a single penny to pay for it.
So we will not go ahead with that policy.
Because if we cannot afford it, we cannot do it.
Next, the Illegal Migration Act, passed by the previous government, made it impossible to process asylum applications or remove people who have no right to be here.
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We need a properly controlled and managed asylum system where rules are properly enforced so that those with no right to be here are swiftly removed.
So we have scrapped their failed Rwanda scheme, which placed huge pressure on the Home Office budget.
To bring down these costs as soon as possible, my RHF the Home Secretary has already laid legislation to remove the retrospective element of the Illegal Migration Act…
… which will significantly reduce the use of hotel accommodation.
These measures will save nearly £800m this year and avoid costs spiralling even further next year.
This was a bad use of taxpayers’ money and we will not do it.
Mr Speaker, the previous government claimed it was “levelling up” our country.
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At Autumn Statement last year, the former Chancellor announced nearly £150m for an “Investment Opportunity Fund”.
But not a single project has been supported from the Fund.
So, following discussions with my RHF the Deputy Prime Minister, I am cancelling it today.
The previous government also made a series of commitments on transport.
Promises that people expected to be delivered.
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We have seen from the National Audit Office the chaos that the previous government presided over.
Projects over budget and delayed again and again.
The spending audit has revealed nearly £800m of unfunded transport projects that have been committed next year.
So my RHF the Transport Secretary will undertake a thorough review of all these commitments.
As part of that work, she has agreed not to move forwards with projects that the previous government refused to publicly cancel, despite knowing full well they were unaffordable.
That includes proposed work on the A303 and the A27…
… and my RHF will also cancel projects in the “Restoring our Railways” programme which have not yet commenced.
If we cannot afford it, we cannot do it.
Mr Speaker, the previous government had plans for a retail sale of Natwest shares.
We intend to fully exit our shareholding in NatWest by 2025-26.
But having considered advice I have concluded that a retail share sale offer would involve significant incentives that could cost taxpayers hundreds of millions of pounds.
It would therefore not represent value for money, and it will not go ahead.
This is a bad use of taxpayers’ money and we will not do it.
Next, let me address the unfunded pressures in our NHS and our social care sector.
In October 2020, the government announced that 40 new hospitals would be built by 2030.
Since then, only 6 have started their main construction activity.
And less than half of the 40 hospitals have even started construction.
The National Audit were clear that delivery was wildly off track.
But since coming into office, it has become clear that the previous government continued to maintain its commitment to 40 hospitals…
… without anywhere close to the funding required to deliver them.
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We need to be straight with the British people about what is deliverable and what is affordable.
So we will conduct a complete reset of the New Hospitals Programme, with a thorough, realistic and costed timetable for delivery.
Mr Speaker, adult social care was also neglected by the previous government.
The sector needs reform to improve care and to support staff.
In the previous parliament, the government made costly commitments to introduce adult social care charging reforms.
But then, they pushed them back repeatedly…
… including just two years ago…
… because they knew that local authorities were not ready…
… and that their promises were not funded.
So it will not be possible to take forward these charging reforms. This will save over £1bn by the end of next year.
Mr Speaker, the previous government made commitment after commitment without knowing where the money was going to come from.
They did this repeatedly, knowingly and deliberately.
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And I am taking the first steps to clean up what they have left behind.
But the scale of the inheritance we have been left, means the decisions we have so far announced will not be enough. This level of overspend is not sustainable.
It therefore falls to us to take further difficult decisions on spending that generate in year savings.
Mr Speaker, the last Labour government lifted over one million pensioners out of poverty.
And I repeat today the commitment we gave that we will protect the Triple Lock.
But the scale of the situation we are dealing with means incredibly tough choices.
So that is why today, I am making the difficult decision that those not in receipt of Pension Credit will no longer receive the Winter Fuel Payment from this year onwards.
The Government will continue to provide Winter Fuel Payments worth £200 to households receiving Pension Credit…
… or £300 for households in receipt of Pension Credit with someone aged over 80.
Let me be clear: this is not a decision I wanted to make.
Nor is it one that I expected to make.
But it is a necessary and urgent decision I must make – It is the responsible thing to do to fix the foundations of our economy and bring back economic stability.
Alongside this change, I will work with my Right Honourable Friend the Work and Pensions Secretary to maximise the take up of Pension Credit by…
… bringing forward the adminstration of Housing Benefit and Pension Credit, pushed back by the previous government…
… and working with older peoples’ charities and local authorities to raise awareness of Pension Credit, and help identify households not claiming it.
Mr Speaker, this is the beginning of a process, not the end.
I am announcing today that I will hold a Budget on October 30th alongside a full economic and fiscal forecast from the Office for Budget Responsibility.
I have to tell the House that Budget will involve taking difficult decisions to meet our fiscal rules across spending, welfare and tax. [Redacted political content]
It will be a Budget to fix the foundations of our economy.
And it will be a Budget built on the principles that this new government was elected on.
First, we will treat taxpayers’ money with respect by ensuring that every pound spent is well spent…
… and we will interrogate every line of public spending to ensure it represents value for money.
Second, I can repeat – from the despatch box – our manifesto commitment that we will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT.
And today my Right Honourable Friend the Exchequer Secretary is publishing further detail on our manifesto commitments to close tax loopholes and clamp down on tax avoidance…
… to ensure we bring that money in as quickly as possible.
My third principle is that we will meet our fiscal rules.
We will move the current budget into balance…
… and we will get debt falling as a share of the economy by the end of the forecast.
These are the principles that will guide me at the Budget.
But let me be honest: challenging trade-offs will still remain.
So today I am also launching a multi-year Spending Review.
The review will set departmental budgets for at least three years, providing the long-term certainty that has been lacking for too long.
As part of that process, final budgets for this year and budgets for next year – 2025-26 – will be set alongside the Budget on 30th October.
I will look closely at our welfare system…
… because if you can work, you should work.
That is the principle of this government.
Yet under the previous government, welfare spending ballooned while inactivity has risen sharply in recent years.
So we will ensure the welfare system is focused on supporting people into employment…
… and we will assess the unacceptable levels of fraud and error in our welfare system, and take forward action to bring that down.
Mr Speaker, to fix the foundations of our economy, we must ensure that never again can a government keep from the public the true state of our public finances.
The fiscal framework which I have inherited had several flaws.
It allowed the government to run down the clock on departmental budgets…
… avoid difficult decisions
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So I am announcing the most significant set of changes to our framework since the inception of the Office for Budget Responsibility, which will come into effect this Autumn.
First, we have introduced legislation to ensure every significant and permanent tax or spending announcement must be accompanied by an OBR forecast through our “fiscal lock”, so we can never again see a repeat of the mini-budget.
Second, we will require the Treasury to share with the Office for Budget Responsibility its assessment of immediate public spending pressures, and enshrine that rule in the Charter for Budget Responsibility…
… so no government can ever again cover up the true state of the public finances.
And finally, we will ensure that never again do public service budgets get set at only a few months’ notice.
Instead, Spending Reviews will take place every two years, with a minimum planning horizon of three years, to avoid uncertainty for departments and to bring stability to the public finances.
I have already spoken to the Chair of the Office for Budget Responsibility to brief him on the findings of our audit and our reforms.
He has welcomed those, and will initiate his own review into the information provided to the OBR by the Treasury ahead of the Spring Budget. The Treasury stands ready to support this work.
Mr Speaker, by launching the Spending Review I am also today firing the starting gun on a new approach to public service reform to drive greater productivity in the public sector.
We will embed an approach to government that is…
… mission-led…
… that is reform driven, with a greater focus on prevention and integration of services, at both a national and a local level..
… and that is enabled by new technology, including through the work of my RHF the Secretary of State for Science, Innovation and Technology on the opportunities of AI to improve our public services.
And we will establish a new Office of Value for Money, with an immediate focus on identifying areas where we can reduce, stop or improve the value of spending….
… and we will appoint a Covid Corruption Commissioner, to bring back money owed to taxpayers after contracts worth billions of pounds were handed out by the previous government during the pandemic.
Ahead of the Spending Review, I will also review the cost of our political system, including restricting eligibility for ministerial severance payments based on time in office.
I expect all levels of government to be run efficiently and effectively and I will work with leaders across our country to deliver that.
That means effective local government …
… a civil service delivering good value for the British taxpayer…
… and reform of our political institutions, including the House of Lords, to keep costs as low as possible.
The Budget and Spending Review will also set out further progress on our number one mission: to grow our economy.
Because economic growth is the only way to sustainably improve our public services and sustainably improve our public finances.
So we will use the Spending Review to prioritise specific areas of capital investment that leverage in billions more in private investment.
It won’t happen overnight.
It will take time and it will take focus.
But we have already made significant progress.
Planning reforms to get Britain building.
A National Wealth Fund to catalyse private investment
A pensions investment review to unlock capital for our businesses.
Skills England to create a shared national ambition to boost skills across our country.
And work across government on a new industrial strategy…
… driven forward by a Growth Mission Board to ensure we deliver on our commitments.
We have fundamental strengths on which we can build.
And I look forward to welcoming business leaders to the International Investment Summit in Britain later this year.
Because I know that if we can create the stable conditions which investors need to thrive, we can build on the UK’s strengths and return confidence to our economy..
… so that entrepreneurs and businesses big and small know that this is a place to do business as that is the bedrock on which economic growth must be built.
Mr Speaker, the inheritance from the previous government is unforgiveable.
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I will never do that.
I will restore economic stability.
I will make the tough decisions.
I will fix the foundations of our economy.
So we can rebuild Britain.
And make every part of our country better off.
And I commend this Statement to the House.
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