Rachel Reeves' spending audit at-a-glance

Chancellor Rachel Reeves has revealed the significant government overspending that has taken place and laid out plans for spending cuts and tax adjustments to overcome this. This audit has sparked political debate and raised concerns about the future of the UK economy. Here's a summary of the main points.

Breakdown of the Government’s financial overspend

Reeves highlighted a £21.9 billion overspend¹ this year, driven by:

• Public sector pay: An additional £11.6 billion was required for public sector pay increases¹, exceeding the original budget.
• Asylum and NHS costs: Unplanned expenses related to asylum services and NHS strike pressures totalled £7.9 billion¹.
• Military aid to Ukraine: The government spent £1.7 billion more than expected on military support for Ukraine¹.
• Rail subsidies: A slower-than-expected rail passenger recovery post-COVID required an extra £1.6 billion¹.
• Inflation's impact: Higher-than-expected inflation increased overall government spending across various areas.

Immediate spending cuts to take place

To address this financial gap, Reeves announced a series of spending cuts, amounting to £5.5 billion this year and increasing to £8.1 billion next year¹:

• Winter fuel payments: These payments will be withdrawn for around 10 million pensioners who do not receive means-tested benefits¹.
• Social care funding: Plans for a cap on social care costs in England, due to take effect in 2025, have been cancelled.
• Infrastructure projects: Several infrastructure projects have been halted, including the Stonehenge tunnel and various road and rail developments.
• Education reforms: Proposed changes to A-levels and T-levels in England have been scrapped.
• Consultant and administrative costs: The government will reduce spending on consultants.

A pay rise for public sector workers

Reeves also confirmed pay rises for millions of public sector workers, criticising the previous government for delaying these decisions:

• NHS, teachers and armed forces: Most workers in these sectors will receive pay increases ranging from 5.5% to 6%¹.
• Junior doctors: To resolve ongoing strikes, a two-year pay deal has been offered with an average increase of 22%¹.

Upcoming tax reforms and long-term financial strategies

The chancellor outlined upcoming tax changes and emphasised long-term strategies for financial control:

• Private school fees: A 20% VAT will be introduced on private school fees from January 2025¹.
• Non-domicile tax: The current non-dom tax status (for UK residents who claim their permanent home is abroad) will be replaced with a new residence-based tax regime from April 2025¹.
• Windfall tax: The windfall tax on energy and gas profits will increase by 3% from November¹.
• Hospital construction review: The plan to build 40 new hospitals by 2030 will be reassessed¹.
• New oversight body: The Office for Value Money will monitor government spending.
• AI in public services: AI will be encouraged to improve efficiency and cut costs.

Ahead of the autumn Budget on 30 October, Reeves signalled more difficult decisions on spending, welfare, and taxes are expected.

Sources

1.    https://www.bbc.co.uk/news/articles/cd1r7d76vdlo

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August 2024