Rachel Reeves will lay the ground for cuts to public spending, tax rises and delays to some infrastructure projects as she sets out the dire economic situation the Labour government inherited from the Conservative party. She is expected to pause work on a string of infrastructure projects on Monday, including Boris Johnson’s plan to build 40 hospitals and the proposed two-mile road tunnel bypassing Stonehenge. Reeves will announce an “office of value for money”, an arm’s-length body that will use civil service resources to identify and recommend savings for the current financial year. She will say surplus publicly owned property will be sold and action will be taken straight away to stop “non-essential” spending on consultants. A Treasury source said the announcement was not about “a return to austerity” but about repairing the damage of “14 years of unfunded promises”, which had left a £20bn hole in government spending for essential public services. The Guardian reported on Friday that Reeves was to approve above-inflation pay rises for millions of public sector workers, with teachers and NHS staff in line for a 5.5% pay rise costing approximately £3.5bn more than had been budgeted for. The pay rises are seen as necessary to avoid the costs to the economy seen in the waves of strike action under the last government. “Before the election, I said we would face the worst inheritance since the second world war,” Reeves will say. “Taxes at a 70-year high. Debt through the roof. An economy only just coming out of recession. I knew all those things. I was honest about them during the election campaign. And the difficult choices it meant. “But upon my arrival at the Treasury three weeks ago, it became clear that there were things I did not know. Things that the party opposite covered up from the country.” Pat McFadden, the chancellor of the Duchy of Lancaster, said on Monday the state of the public finances was worse than could have been gauged by forecasts from the Office for Budget Responsibility (OBR) fiscal watchdog. Asked if the Conservative government had misled the OBR, McFadden told Sky News: “They [OBR forecasts] are going to have to be revised today, because there are in-year pressures that the government didn’t tell us about.” Labour’s manifesto committed not to raise taxes on working people, relying instead on economic growth to improve government funds. It has ruled out increases in income tax, VAT, national insurance and corporation tax, leaving changes to capital gains tax, inheritance tax and pensions relief on the table. McFadden said the tax promise still stood, adding: “Today is not about tax increases. Today is not a budget. Today is, I’m afraid, about some very difficult spending decisions that the chancellor is going to be setting out.” He said one example of spending pressures that Reeves would reveal was paying for the Rwanda asylum scheme. “What we have discovered since taking office a few weeks ago is things were even worse than we thought, and the previous government was certainly guilty of running away from the situation. Let me give you a couple of examples,” he said. “We were told, for example, that the Rwanda scheme was going to cost £400m. We have now found that it is £700m, with billions more to be spent in future. The government were emptying the country’s reserves to pay for other parts of their asylum policy. “In addition to that, the secretary of state for education had a pay offer for teachers on her desk that nobody told anyone about during the election.” Paul Johnson, the director of the Institute for Fiscal Studies, said it seemed “pretty likely” Labour would raise taxes in some form, suggesting the £20bn hole could be filled “by reversing the national insurance cuts Jeremy Hunt made in his last two budget statements”. “If it weren’t for the politics, that would be the most straightforward thing to do,” he told Times Radio. Other leading economists suggested the government could “raise a few billion pounds from reforms to capital gains tax and inheritance tax”. Reeves will announce that an OBR forecast would coincide with a budget and spending review this year, the date of which will be announced on Monday. She will commit the government to one big fiscal event each year to end “surprise budgets”, which have previously caused uncertainty for the markets and family finances. She is expected to scrap or scale back a number of large infrastructure projects, including the £500m Restoring Your Railway Fund, the £1.7bn A303 dual carriageway Stonehenge bypass and the A27 Arundel bypass in West Sussex. Reeves will say: “It is time to level with the public and tell them the truth. “The previous government refused to take the difficult decisions. They covered up the true state of the public finances. And then they ran away. I will never do that.”
Gareth Davies MP, the shadow exchequer secretary to the Treasury, said Reeves was “trying to con the British public into accepting Labour’s tax rises”, adding: “Her words and actions on supposedly saving the taxpayer money are an insult when she is secretly planning to raise their taxes at the same time.”