Rachel Reeves ‘planning to raise taxes and cut spending’ in October budget after large public sector pay rises

21 August 2024, 11:44

Rachel Reeves is planning to raise taxes and cut spending in the October Budget
Rachel Reeves is planning to raise taxes and cut spending in the October Budget. Picture: Alamy

By Asher McShane

Rachel Reeves is planning to raise taxes, cut spending and clamp down on benefits in October’s budget after large public sector pay rises fulled a surge in government borrowing.

Listen to this article

Loading audio...

The Treasury borrowed £3.1bn in July, according to the Office for National Statistics, well above the £0.1bn anticipated by the Office for Budget Responsibility. 

The Government has borrowed £51.4bn this year so far, which is £4.7bn more than the OBR predicted.

Last month she announced she was scrapping winter fuel payments for most pensioners, shelved plans for social care reform and shelved plans for road, rail and hospital investment as part of plans to reduce borrowing costs.

Ms Reeves has accused the Tories of leaving behind a £22billion 'black hole' in public finances when they left office.

Read more: Home Secretary Yvette Cooper announces new plans to 'boost border security' in bid to tackle small boat smuggling gangs

Read more: Probe launched into ‘whether hatches of Bayesian superyacht were left open and caused it to sink in minutes’

A source told the Guardian: “We don’t accept the positive economic inheritance line, given the decade that went before – but regardless, nothing in the recent data can offset the scale of the black hole in the public finances we’re looking at.”

The Treasury borrowed £3.1bn in July
The Treasury borrowed £3.1bn in July. Picture: Alamy

She is reportedly considering raising inheritance tax in the Budget on Ocotber 30 - and a squeeze on public spending is also expected.

She is believed to be considering:

• Raising more money from inheritance tax and capital gains tax.

• Sticking to plans for a 1% increase in public spending even though it would involve cuts for some Whitehall departments.

• Rejecting pressure to scrap the two-child benefit cap.

• Changing the way debt is measured to exclude the Bank of England.

Last month Ms Reeves accused the previous Conservative government of leaving a £21.9 billion black hole in the public finances, through unfunded commitments that she said it had "covered up".

Chief Secretary to the Treasury Darren Jones said: "Today's figures are yet more proof of the dire inheritance left to us by the previous government.

"A £22 billion black hole in the public finances this year, a decade of economic stagnation and public debt at its highest level since the 1960s, with taxpayers' money being wasted on debt interest payments rather than on our public services."

The ONS figures showed that public sector spending of £107.4 billion last month - up £3.5 billion year-on-year - far outweighed receipts of £91 billion in what is normally a bumper month for tax revenues.

The ONS data also revealed that public sector net debt excluding state-owned banks was estimated at 99.4% of gross domestic product (GDP) at the end of July; this was 3.8 percentage points more than a year ago and remains at levels last seen in the early 1960s.

Jessica Barnaby, deputy director for public sector finances at the ONS, said: "Revenue was up on last year, with income tax receipts in particular growing strongly.

"However, this was more than offset by a rise in central Government spending where, despite a reduction in debt interest, the cost of public services and benefits continued to increase."

Government borrowing in July is usually low thanks to a surge in self-assessment tax receipts, with a record £12.9 billion being received in July.

But July's data showed soaring public spending as social benefits leaped higher due to recent inflation-linked increases.

The figures do not yet take into account the recent round of public sector pay rises announced by the Labour Government.

Ms Reeves last month ditched winter fuel allowances for 10 million pensioners as part of immediate action to address a shortfall in the public finances by £5.5 billion, with the rest of the gap to be tackled at a Budget on October 30.

Experts are warning that the latest set of borrowing figures raise the spectre of further tax rises and more borrowing to cover spending on public services.

Recent better-than-expected growth figures, which saw GDP rise by 0.6% between April and June, are not expected to soften the blow.

Isabel Stockton, senior research economist at the Institute for Fiscal Studies, said: "The early signs are that better-than-expected growth figures won't be enough save Rachel Reeves from tough choices in her first Budget on October 30.

"The combination of in-year spending pressures identified at last month's spending audit and the ongoing, and well known, pressures facing many public services suggest that the accompanying spending review for 2025-26 could be a particularly difficult exercise."

More Latest News

See more More Latest News

Ukraine war is the ‘front line’ for Europe and UK will up defence spending, Lammy says as Zelensky calls for European army

Ukraine war is ‘front line’ for Europe and UK will up defence spending, Lammy says as Zelensky calls for 'army of Europe'

Flag of the United Kingdom with surveillance camera and barbed wire

UK spending millions on ad campaign painting gloomy picture of Britain to deter Albanian immigrants

Flack, who was also known for presenting ITV's Love Island, took her own life on February 15 2020 at the age of 40.

Laura Whitmore shares heartbreaking final messages from Caroline Flack five years on from star's death

Exclusive
The former Deputy Foreign Secretary said: “Many countries in Europe are simply not spending anywhere near, in percentage terms, what America is spending.

UK needs to ‘spend less on welfare and more on defence’ to support Ukraine, former Deputy Foreign Secretary tells LBC

Craig and Lindsay Foreman

British couple on motorbike adventure held in Iran pictured for the first time as family break silence

The Jet2 plane was forced to divert.

Jet2 plane bound for UK makes emergency landing after passenger dies on board

he Philadelphia Eagles celebrate in front of the Philadelphia Museum of Art during the Philadelphia Eagles Super Bowl Championship Parade on February 14, 2025

Two women shot and injured during Philadelphia Eagles Super Bowl victory parade, police say

Social media footage showed a man being kicked on the ground by his knife-wielding attacker.

Two charged by police after shock footage shows man kicked and spat at by knifeman after ‘burning Koran’ in London

Jannik Sinner

World tennis number one Jannik Sinner handed three-month ban for doping

Keith Edun, 47, used the messaging app “Kik” to spread vile images of children

Predator who encouraged man to rape a baby after sharing vile images of children online is jailed for 21 years

President of Ukraine Volodymyr Zelensky speaks during the 61st Munich Security Conference on February 15, 2025 in Munich, Germany.

Zelenskyy calls for creation of ‘European army’ as he warns Russia 'will pull Europe apart' if not defeated

The woman who said she was raped by rappers and business moguls Jay-Z and Sean "Diddy" Combs in 2000, when she was 13, has dropped her civil lawsuit against both men.

Woman who accused Jay-Z and Sean ‘Diddy’ Combs of raping her when she was 13 drops lawsuit

Liam Payne died last Wednesday.

One Direction star Liam Payne was 'sectioned' after near-fatal overdose months before death, close friend claims

Hamas hands over 3 Israeli hostages in the Gaza Strip to Red Cross

Israeli hostages paraded on stage before being freed as four Palestinian prisoners released in 'critical condition'

uk british national lottery euromillions ticket with picks

Winning numbers revealed as single UK EuroMillions ticket holder scoops massive £65million Valentine’s Day jackpot

Emergency services were called just after 7pm on Friday amid reports a woman had suffered serious injuries

Woman dies after Valentine's Day shooting at village pub as murder probe launched