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Rachel Reeves is set to formally delay a raft of “unfunded” roads and hospital projects as the Chancellor seeks to plug an estimated £20bn budget hole she says was left by the last Conservative government.
As well as highlighting problems in areas such as prisons and the asylum system, government officials said Reeves would argue on Monday that she inherited capital projects that were unfunded and had unachievable deadlines.
Reeves’ problems have been exacerbated by recommendations from independent pay review bodies that public sector workers should see pay rises of around 5.5% in 2024/25, well above inflation at 2%.
Her allies said it was “likely” she would fully follow the recommendations on Monday. The Labour chancellor warned of the “costs” of not doing so in terms of industrial disputes and recruitment and retention problems.
Applied to the public sector as a whole, the bill could cost around £8bn more a year than the Treasury had anticipated. The bill will contribute to a budget hole of around £20bn, according to Whitehall officials, who cautioned that the figure had not yet been finalised.
Reeves’ “audit” of Labour’s spending legacy has been branded by the Conservatives a charade, which they say is an attempt to provide political cover for the tax rises Reeves had planned all along.
In a statement to MPs on Monday, Reeves will try to embed in voters the idea that former Conservative prime minister Rishi Sunak’s government left behind a public realm built on sand and incredible promises.
Key road projects, years in the making, could be at risk as rising inflation pushes up cost estimates, Labour officials say. “A lot of these projects are not funded,” one said.
Prime Minister Sir Keir Starmer has refused to commit to a new £1.7bn tunnel under the Stonehenge monument on the A303, although a final decision cannot be made until a decision on the project by the Court of Appeal in early autumn.
The Lower Thames Crossing, a 14-mile road and tunnel in east London that is expected to cost £9 billion, is also under threat after a decision on its future was delayed by six months due to the general election.
Separately, Health Secretary Wes Streeting is set to “redesign” the Tories’ flagship New Hospital Programme, under which 40 hospitals on the crumbling NHS estate were to be built or expanded.
Streeting told MPs this week it was “painfully clear” the programme would not be achievable by 2030 as resources were being absorbed by repairing existing hospitals made of crumbling concrete.
“I want the new hospital programme to be completed, but I am not prepared to give people false hope about how soon they will get the facilities they deserve,” he said.
Formally delaying major investment projects will be awkward for Reeves and Starmer, who have promised to spark a construction boom, but the chancellor has also insisted that all public spending must be paid for.
Shadow chancellor Jeremy Hunt told the Financial Times that Reeves was looking for an excuse to raise taxes in her autumn budget, the date of which she will also reveal on Monday.
“With the reform of social protection, productivity and wage control, it is perfectly possible to balance the accounts and even continue to reduce certain taxes,” he said.
But economists say the lingering effects of high inflation and pressures on services such as prisons, the NHS, defence and asylum have combined to present the new chancellor with an immediate headache.
“This year was always going to be a crucial year,” said Ben Zaranko of the Institute for Fiscal Studies, noting that 2024-25 is the final financial year of the spending review set out by Sunak when he was chancellor in 2021.
Spending under the deal was heavily front-loaded, and high inflation has eroded around £15bn of the real terms value of public service budgets this year compared with what was planned for 2021, he said.
Other budgetary problems arise from issues such as the need to house asylum seekers and the cost of the now-abandoned Rwanda programme, which Home Secretary Yvette Cooper this week estimated at £700m.
The Home Office’s budget was effectively frozen in cash terms between 2023-24 and 2024-25 as part of the 2021 spending review, leaving little room for unexpected overruns.
Meanwhile, the Department for Transport’s capital budget was set to increase by just 0.6% a year in real terms from 2021-22 to 2024-25. “You can easily get to a pretty big number,” Zaranko said, referring to departmental overspending.
The Treasury declined to comment.
