Reeves leads the charge against £22 billion shortfall

In her first major speech as Chancellor in Parliament, Rachel Reeves came out swinging, accusing the Conservatives of leaving an “unforgivable” £22 billion black hole in public finances, as well as hinting that certain taxes might have to rise to address the shortfall.

The Treasury’s blame sheet highlighted a £21.9 billion overspend, citing key factors such as £6.4 billion on asylum and immigration (including accommodation costs and the Rwanda refugee scheme), £1.7 billion on military assistance to Ukraine, and £1.6 billion on supporting the railways.

To tackle the "black hole", Reeves announced plans to end the winter fuel allowance for pensioners not on benefits, scrap some road and rail projects, and halt "all non-essential consultancy spend." She also confirmed a 22% two-year pay offer to junior doctors, with teachers and NHS workers set to receive above-inflation pay rises.

Unexpectedly, just after Reeves concluded her audit, the Office for Budget Responsibility (OBR) published a letter supporting the central claim that the new government was left in a dire financial situation. The OBR also announced a review of the March forecast to assess the “adequacy” and “assurances” provided by the Conservatives.

Reeves also emphasised her support for "working people" through the announcement of public sector pay rises, at the expense of those not working, such as pensioners - a group typically more supportive of the Conservatives and thus seen as "fair game" by many on the broader left.  Despite this, she resisted calls for wealth taxes, framing any further tax changes within the context of cracking down on loopholes, such as VAT on private schools, the windfall tax on big oil and gas, and the non-dom status.

Some measures, such as scrapping major infrastructure projects, may be unpopular within her own party and demonstrate clear fiscal hawkishness from the new Chancellor. However, with a large majority and the backing of the OBR and the Institute for Fiscal Studies (IFS), Reeves and Starmer are operating from a position of unprecedented strength, making this an opportune moment to make tough decisions.

Reeves and Labour hope to create their own "there’s no money left" scenario, using the previous government's financial mismanagement to justify difficult and potentially unpopular short-term decisions. Former Chancellor Jeremy Hunt accused Reeves of "trash talking" the economy with a "cock and bull" story about the state of public finances. However, he failed to rebut specific overspends, particularly on immigration, which lends further credibility to Reeves' claims.

Monday’s announcements go beyond merely assigning blame or making Jeremy Hunt the scapegoat. They outline the initial framework for the 30th October Budget, which will feature a multi-year Spending Review next spring and likely include tax increases. At that point, attributing the issues to the previous government will appear to be the easy part.

The challenge now will be to ensure that the cuts to public investment do not stifle economic growth - a key focus for Labour since coming into power. Balancing fiscal responsibility with maintaining economic momentum will be crucial as they prepare for the official Budget over the coming months.