After just over three weeks in power, the new Labour government has discovered that government departments are in a worse state than previously thought. On Monday, the Chancellor will argue that the public finances are in a bad position, and difficult decisions will need to be made. This is to prepare the public for potential announcements that may not be well-received, and to shape the political narrative.
However, some of the challenges that the government is facing were already known. The Office for Budget Responsibility publishes the state of the country’s books twice a year, most recently last November, and it was clear during the election campaign that there would be tough decisions to come. There were warnings of tax rises or cuts due to a squeeze on public spending, and the Institute for Fiscal Studies suggested that some government departments could face cuts of between £10bn and £20bn.
While Treasury insiders claim there have been surprises since they took over, some issues were already known. Independent pay review bodies had already recommended pay increases of 5.5% for teachers and nurses, which will cost billions of pounds, and the last government had budgeted for a lower settlement of 2%. Labour has also discovered that the Rwanda scheme was costing hundreds of millions of pounds more than it realised, and that hospital building programmes in England are costing more than budgeted for.
Although the Treasury intends to publish a full report and breakdown on Monday, outlining where a “black hole” has been discovered, the new government wants to frame the debate for the coming years by arguing that it has been left with a dire inheritance from the Conservatives, and it has to make difficult decisions as a result. However, the Conservatives argue that Labour is paving the way for undisclosed tax rises. The Labour government has pledged not to increase income tax, National Insurance, VAT, or corporation tax, and has said it will not borrow extra money for day-to-day spending. It is likely to pay public sector workers more than inflation, in line with recommendations from pay bodies.
Overall, the Labour government has found unexpected challenges, but it is also trying to shape the political narrative and prepare the public for difficult decisions ahead
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