Rachel Reeves: Labour has inherited a projected overspend of £22 billion from the Conservatives

Chancellor Rachel Reeves has announced cuts to public spending worth billions of pounds, including restricting winter fuel payments to those on Pension Credit or other means-tested benefits.

In a speech this afternoon, Reeves declared that Labour had inherited a projected overspend of £22 billion from the Conservatives, and accused the previous government of “covering up the true state of the public finances”.

The Chancellor said she had made “difficult decisions” to find £5.5 billion of savings this year and £8.1 billion next year, while pledging to “fix the foundations of our economy”.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

She also revealed the date of the Budget - 30 October - and said there would only be “one major fiscal event per year”.

According to Reeves, this would “put an end to surprise budgets, which have previously caused uncertainty for both the markets and family finances across the country”.  

In 2022, Liz Truss and Kwasi Kwarteng’s mini-Budget sent shockwaves through the economy after it announced billions of pounds of unfunded tax cuts. 

Today’s political announcement comes just days before another big event for the UK economy. On Thursday, 1 August, the Bank of England’s Monetary Policy Committee will meet to discuss cutting interest rates.

Most economists are expecting the Bank to finally cut the 5.25% base rate, possibly to 5%.

We look at what Reeves announced today, from ditching the Stonehenge tunnel and a NatWest share offer to axing the winter fuel payment for millions of pensioners.

Labour's spending cuts

Reeves's mantra for today's speech was "if we cannot afford it, we cannot do it" as she took a sledgehammer to a raft of spending commitments.

First, she said that all government departments would be asked to make savings totalling at least £3 billion.

All non-essential spending on consultants would be stopped.

The Chancellor axed several transport projects: the A303 Stonehenge tunnel, A27 Arundel bypass and the Restoring Your Railway programme.

Meanwhile, she said other transport projects would be reviewed by the transport secretary.

Reeves also announced that the government would drop the NatWest share sale to retail investors.

Next on her list was Boris Johnson’s New Hospital programme. She said the government would conduct a "complete review" of the project, adding that only one had so far opened.

The last part of her speech caught many people by surprise, touching on social care and pensioner payments.

Reeves announced that Labour would not take forward the previous government's social care reforms.

This means it will not introduce a cap on social care charges.

Sarah Coles, head of personal finance at the investment platform Hargreaves Lansdown, called it a "bitter blow".

She commented: "Rachel Reeves has announced that the reforms outlined in 2021, and originally promised for last year, were never funded, and so the issue has been jettisoned yet again. It’s devastating for those people who need care and face catastrophic costs."

The Chancellor's next target was winter fuel payment. "Those not on Pension Credit or other means-tested benefits will not get winter fuel payment from this year," announced Reeves. 

Around 10 million pensioners will lose their winter fuel payments - something Reeves referred to as a "necessary and urgent decision".

The move will save the government about £1.5 billion a year.

Reeves also revealed that more work would be done to boost the take-up of Pension Credit, including identifying eligible claimants.

Receiving Pension Credit unlocks the door to other benefits, including from later this year, the winter fuel payment.

In notes accompanying Reeves's speech, the government announced that the VAT tax break for private schools would end on 1 January 2025.

It will not be possible to pre-pay the fees now and beat the tax hike. The government said: "20% VAT will also apply to pre-payments of fees for terms starting on or after 1 January 2025 made on or after 29 July 2024."

Office of Value for Money

The Chancellor also announced that an “Office of Value for Money” would be established to deliver better value for money for taxpayers, using existing civil service resource. 

This would “put an end to wasteful spending in government, providing targeted scrutiny of public spending so that value for money governs every decision government makes”, according to the Chancellor.

Reeves said it will begin work on identifying and recommending savings for the current financial year, while also ensuring that poor value for money spending is cut off before it begins. 

She added that action would be taken to stop non-essential spending on consultants, alongside hastening delivering admin efficiencies in departments. 

Budget Responsibility Bill

Meanwhile, the government highlighted the Budget Responsibility Bill, which was mentioned in the King’s Speech earlier this month. 

This will ensure all big fiscal announcements on tax or spending that are worth more than 1% of the UK’s GDP will be subject to scrutiny by the independent Office for Budget Responsibility (OBR). 

The Treasury says this will guard against large-scale unfunded commitments in the future. 

Neil Shearing, group chief economist at the consultancy Capital Economics, notes that the new team at the Treasury “have been laying on the gloom pretty thick since the election”.

“Reeves has even stated that she has been bequeathed the worst economic inheritance of any incoming government since the Second World War. This gloom has been motivated more by political positioning than economic reality, reflecting efforts to manage the expectations of both an electorate that voted for change and backbench MPs who are clamouring to loosen the purse strings”

However, he adds that the government will have to “run a tight fiscal ship”, with “public debt currently running at 99.5% of GDP – the highest since 1962”.

Reeves’s first Budget

The Chancellor also confirmed the date of the much-anticipated Budget: 30 October.

It will be published alongside a Spending Review, and Reeves said she had already commissioned an OBR forecast to coincide with these.

Labour said it aims to “get debt falling as a share of the economy by the fifth year of the forecast”.

In terms of changes to your personal finances in the Budget, experts expect to see tax hikes for higher earners.

For example, capital gains tax (CGT) could be a target. The rates could be increased to align with income tax rates. Or the timing of when CGT is applied could change, such as applying it when someone inherits an asset that has risen in value.

With inheritance tax to pay as well, it could mean bereaved families pay a “double death tax” of more than 50%.

There is also mounting speculation that pension tax relief could be reformed. If a flat rate of below 40% was applied, it would mean higher-rate taxpayers and additional-rate taxpayers would receive less tax relief on their pensions.

Other options open to Reeves and her colleagues include cutting the £60,000 annual tax-free pension allowance, or reducing or scrapping the 25% tax-free cash.