Chancellor Rachel Reeves is set to unveil a £19bn deficit in the public finances, paving the way for an expected tax rise in the autumn.
The announcement comes as it assesses fiscal challenges inherited from the previous conservative administration.
An early audit has revealed “excess pressures” of around £19bn in the 2024-25 financial year, according to government sources. These include the need to increase public sector pay, with Reeves expected to agree several inflation-adjusted pay deals.
The financial assessment, due to be presented to parliament next Monday, is due to include a detailed report on the state of each department’s finances. Reeves is also expected to announce her first budget on the same day. The Treasury will publish a no-frills assessment based on the latest ministerial figures.
“These are not simple calculations because many departments make many different assumptions,” a UK government source said.
Policy experts have been anticipating Reeves’ announcement for months, but during the general election campaign Labour has avoided detailed discussions of the fiscal challenges it will face in power. Sources say the exact figure for the fiscal gap is still being determined and could be adjusted through efficiencies, delays or curbs on some projects.
Experts have warned that the chancellor may need to raise taxes by up to £25bn this autumn to ease the huge spending pressures left behind by her Conservative predecessor Jeremy Hunt. Reeves will set out how to tackle the £19bn deficit during a public spending review with Treasury officials in preparation for the budget.
Labour leader Sir Keir Starmer has vowed not to return to austerity, a reference to the severe cuts implemented by George Osborne when the coalition came to power in 2010. Any permanent increases in spending would undermine the chancellor’s ability to meet fiscal rules, which require debt as a proportion of national income to fall by the next general election.
Despite the tough decisions ahead, Reeves is expected to agree several above-inflation wage deals next week to avoid further strikes by public sector workers. Officials are now examining what spending can be accommodated within existing budgets.
“Departments often overbid and then underspend billions of pounds,” one former UK government official explained. “Then programmes are delayed or under-subscribed, so payments are not needed. Departments do find efficiency savings if the Treasury pushes them. Reeves may also take an active option to delay or restrict something.”
The size of the tax increases in the Budget will also depend on the economic forecasts provided by the Office for Budget Responsibility in the weeks leading up to it. During the general election campaign, Labour pledged not to increase income tax, national insurance or VAT. However, there are concerns that the party may consider changes to pensions or inheritance tax relief.
Sir Keir Starmer has hinted at the possibility of higher taxes, pointing to a more severe financial crisis than initially anticipated. Business Secretary Jonathan Reynolds has claimed that key pledges made by the previous government were not properly accounted for in departmental budgets. He pointed out that some of the money for these commitments had been drawn from the Treasury’s £9.2bn reserve, which is normally used for unexpected spending pressures.
Reeves signalled last week that she was prepared to agree pay rises of up to 5.5% for millions of public sector workers, despite inflation running at 2%. That is more than the current 3% plan, but it is essential to prevent further strikes by doctors and teachers. It is rare for ministers to ignore the recommendations of pay review bodies.
The Office for Budget Responsibility has highlighted that central government spending this year is already £4.7bn higher than it forecast in March, while tax revenues have fallen. The IMF warned in May that the chancellor would need to deliver £30bn in spending cuts or tax rises to stabilise the debt burden, with current spending plans of 1% above inflation seen as unrealistic.
A Treasury spokesman said: “The Chancellor has commissioned officials to produce an assessment of the state of government spending, which will be presented to Parliament before the summer recess.”