(Bloomberg) — Chancellor of the Exchequer Rachel Reeves faces growing Cabinet disquiet over the scale of spending cuts she wants to help raise £40 billion ($52.3 billion) to put Britain’s public finances on a stable footing.
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Reeves, who has said the new Labour government inherited a £22 billion fiscal hole from the Conservatives, is determined to use her Oct. 30 budget to give herself a buffer against her target of ensuring day-to-day spending is covered by tax revenues, according to two people familiar with the matter. That means the chancellor is looking at decisions on tax, spending and welfare savings to raise about £40 billion, the people said on condition of anonymity.
The plan has alarmed members of Keir Starmer’s senior ministerial team, with some saying they’d had difficult talks with Reeves and Chief Secretary to the Treasury Darren Jones about the one-year departmental spending review to be announced with the budget. Several told the Treasury the savings they’d been asked to find would not be feasible, people familiar with the matter said.
Starmer and Reeves addressed ministers’ concerns at the start of the cabinet meeting Tuesday, the people said.
Complaints have come from a broad range of ministers, rather than just those in charge of departments with the highest capital spending, the people said. Their concerns relate to spending allocations for 2025-26, and how little time ministers have had to contribute to the spending review, they said.
A spokesperson said in an email the Treasury does not comment on “speculation around tax changes outside of fiscal events.” The £40 billion figure was first reported by the Financial Times on Tuesday.
The unrest underscores the difficult decisions facing Reeves in a budget that is widely seen as the moment that will shape the early years of Starmer’s administration. She is expected to unveil a raft of tax rises and spending cuts to fix the black hole she said was left by the Tories, as well as loosening her fiscal rules to borrow tens of billions to invest in Britain’s ailing infrastructure.
Speaking on a New Statesman podcast last week, Reeves said the £22 billion fiscal hole she’d inherited represented “recurring” and “ongoing” spending pressures, and that there was a “big gap” to close at her budget.
The chancellor was helped on Tuesday when official statistics showed inflation dropped sharply to 1.7% last month. That’s because benefits are increased each April in line with the previous September’s inflation rate — meaning she’ll have a lower-than-expected rise to factor into her calculations.
The key fiscal rule Reeves is trying to meet — to have day-to-day government spending covered by tax revenues by the end of the Parliament — is a new one that the Starmer administration has adopted. Reeves sees it as the primary target she has to hit and wants to give herself a cushion against meeting the goal, according to the people familiar with her thinking.
Even during the election campaign, influential think tanks including the Institute for Fiscal Studies warned that the winner would face tough choices in the autumn budget and spending review. Former Tory Chancellor of the Exchequer Jeremy Hunt left little fiscal headroom in his search of pre-vote tax cuts, while his decision not to hold a spending review before the election meant the Tories did not have to show where cuts would have to be made.
That context meant that ministers did not blame Reeves and Starmer when they raised the issue of spending cuts in Tuesday’s cabinet meeting, people familiar with the conversation said. Both told ministers they appreciated the difficulty of the decisions, according to the people.
Health Secretary Wes Streeting said he was unhappy with the choices facing the government, though he focused his criticism on the Tories, the people said.
Privately, though, some ministers have expressed frustration at the Treasury’s handling of the spending review process.
The cabinet meeting included a debate on how the government would need to use the next phase of its spending review, covering future years, to drive through public sector reforms. Those changes, likely to require an up-tick in government spending later in Labour’s five-year term, would be essential to the administration’s fortunes, according to people familiar with the talks.
The discussion included remarks about how Britons’ interaction with the state does not match their experience with the private sector and people were sick of being taxed for outdated and dysfunctional services, the people said.
In a readout of the meeting, a Labour spokesperson said Reeves “updated the cabinet on preparations for the budget and the spending review, which she said is an opportunity to put the country on a firmer footing.” The chancellor also told ministers the fiscal inheritance “meant there would have to be difficult decisions on spending, welfare, and tax.”
–With assistance from Ellen Milligan, Philip Aldrick and Robert Jameson.
(Updates with inflation in ninth paragraph.)
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