UK chancellor Rachel Reeves has identified a £40bn funding gap ahead of her Budget in two weeks — far more than previously expected — as she prepares big tax rises to patch up the NHS.
The figure represents the funding that Reeves needs to protect key government departments from real-terms spending cuts, cover the enduring impact of an annual £22bn overspend and build up a fiscal buffer for the remainder of the parliament.
The Financial Times has been told by officials close to the Budget process that the Treasury is seeking ways of closing a shortfall of £40bn, with tax rises set to form the centrepiece of her response.
The chancellor could avoid such a radical target if the independent Office for Budget Responsibility produces more optimistic forecasts before the October 30 Budget: more economic growth would reduce the need for big tax rises.
A Treasury spokesperson said: “We do not comment on speculation around tax changes outside of fiscal events.”
Reeves needs to raise taxes or find savings — including via welfare cuts — to meet a new “golden rule” that balances day-to-day spending with tax revenues.
“Just to fill the £22bn black hole that we’ve identified would mean public services just about standing still,” said one government insider, adding that Reeves was determined to inject cash into the NHS.
Jeremy Hunt, Reeves’ Conservative predecessor, left £8.9bn of headroom against his own fiscal rule, which requires debt to fall as a proportion of GDP in the fifth year of a forecast.
Reeves is likely to seek a bigger buffer against economic shocks, since she is at the beginning of a parliament. She wants to take big tax decisions now and has talked of “wiping the slate clean”.
Reeves briefed cabinet colleagues on her Budget thinking on Tuesday, ahead of submitting her final proposals to the OBR on Wednesday.
The chancellor has in recent weeks been warning that “difficult decisions” lie ahead in the Budget on tax, spending and welfare.
She is understood to have told the cabinet: “The Budget will be about protecting working people, starting to fix the NHS and rebuilding Britain. We cannot turn around 14 years of damage in one Budget, but we can start to deliver on our promise of change.”
The Institute for Fiscal Studies, a leading think-tank, said this week that Reeves would need to raise £25bn in tax if she wanted to boost spending increases to a rate that was in line with the growth of the overall economy — far higher than current plans.
Labour also needs to meet election manifesto spending pledges while raising enough funding via tax rises or welfare cuts to bolster the budgets of Whitehall departments, many of which are facing real-terms cuts.
At a one hour cabinet meeting on Tuesday, Reeves spelt out her “difficult inheritance” but said she hoped to find extra money for the NHS.
“If we are having to raise taxes, we want to put the money into the people’s priorities,” said one ally of the chancellor. “The NHS is the number one priority.”
Sir Keir Starmer, prime minister, again on Tuesday refused to rule out an increase in employer national insurance contributions — a tax on business that could raise billions of pounds.
Reeves is also looking to increase capital gains tax, according to officials, along with tax rises for “non-doms” and private equity executives.
“We are facing a difficult inheritance, but the decisions we take at the Budget will be worth it,” Reeves told the cabinet.
“We will put the country on a firmer footing, with honesty about the scale of the challenge — including the £22bn black hole that has been left in the country’s finances.
“That does mean there will be difficult decisions on spending, welfare and tax. But the only way through this in the long term is economic growth through investment.”
Reeves is expected to use the Budget to redefine “debt” to give herself more fiscal headroom, allowing her to borrow more to fund capital projects. Speaking to the FT this month she said her Budget would have a theme of “invest, invest, invest”.
The chancellor told her cabinet colleagues that at the Budget the “fiscal rule that matters” would be what she will call “the golden rule”: a requirement to balance current spending with tax receipts.
This requirement is an echo of the fiscal rule adopted by former Labour chancellor Gordon Brown, although he committed to balance current spending over the economic cycle.
