What’s expected to go in spending cuts – as chancellor prepares to make announcement

By now, you are probably aware that at 3.30pm the new chancellor will tell MPs of an approximately £20bn black hole in the public finances, necessitating immediate painful spending cuts today and paving the way for tax increases in an October budget.

Rachel Reeves and her team will then challenge the Tories over who knew what and when about the shortfall, and hope this argument is ringing in voters’ ears going into the summer.

But as much as Labour insist this is all a surprise – with some, though not total justification – Monday afternoon will tell us a lot we didn’t know about Britain’s future, with lots of clues to what’s next in the fine detail and the nuance.

Here are the key things to watch for.

What exactly is today

Ms Reeves will say the last Tory government has gone “over budget” in the 2024/5 financial year that began in April to the tune of around £20bn.

She will then set out some immediate cost savings, to cover some – but not all – of this £20bn.

Ms Reeves has been advised that “we couldn’t leave a shortfall that big without immediate action” – presumably on account of market reaction – so the overspend gap will be narrowed (but not closed) by “very very painful” immediate savings to the 2024/5 budget.

Ms Reeves is the most powerful she will ever be right now: so expect the hardest of political choices. She will then also give the date of the budget, where it is fair to presume the rest of the shortfall will be made up by tax increases and other spending cuts.

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What is not coming today

The “black hole” in future years. The £20bn figure and the as-yet-unknown amount of immediate spending cuts, only relate to 2024/5, ie this financial year. Everything else is for future budgets and spending reviews.

This matters because there are some items, like the contaminated blood compensation scheme (priced around £10bn and as yet unaccounted for) which are a “future year problem” and therefore won’t show up on Monday and are a lurking nasty for another day.

Could things like this necessitate more spending cuts or tax rises in future? Today might not be as bad as it gets.

Watch closely how different categories of spending make up the ‘black hole’

We have a fair idea of some, but not all, of the items that have caused the £20bn “black hole”.

The state of the prisons is one, while the soaring bill for keeping asylum seekers in hotels is another.

However also alongside this as part of the £20bn “black hole”, will be the decision by ministers to accept the pay review body recommendations on public sector salaries: an above-inflation 5.5% uplift for 450,000 teachers and 1.5 million NHS staff.

This will not have been fully budgeted by the previous Tory government – not because they left a “black hole” in any conventional sense but because agreeing to the pay review body recommendations is a political choice.

In an alternate universe where the Tories won the election, a Sunak government would likely not have accepted the pay body recommendations in full, particularly if it meant they could not fulfil tax cuts promised in the manifesto.

So some items in the “black hole” are the consequence of political choices. Even Labour in opposition did not say they would automatically accept the pay review body recommendations. This may stretch the definition of “black hole” for some.

And watch the numbers even more closely

We have read it will cost up to £10bn to satisfy the pay review body suggestions, and that hotel costs for asylum seekers cost £4bn a year. However part of both of these will have already been accounted for – what matters is the shortfall.

So check the baseline. The Treasury will have done.

Is Reeves right to say this is all a surprise? Or is the IFS right to say she should have known something like this was coming?

The new chancellor and her team are considering going on the attack against the Institute for Fiscal Studies, which has repeatedly said many of the “overspends” were predictable and could have been budgeted for.

The thinktank, like the Tories, will say much of this was evident, but Labour deliberately did not want to engage in a discussion about spending cuts or tax rises beyond the narrow set in the manifesto, so deliberately ignored things like the prison places crisis evident from weekly figures.

Labour will argue in-year adjustments on this scale are very rare, and that they have to act now to reassure the markets because this is reckless. Refereeing this debate on Monday will be far from straightforward.

If there was an emergency black hole, as Labour claims, how was that allowed to happen?

Labour asserts Ms Reeves was presented with a “black hole” figure on her first day in office: it is not the product of searching; it was there waiting for them on the day she entered office.

If Rishi Sunak and Jeremy Hunt had genuinely acted in a way that was grossly irresponsible in connection with the public finances, however, would there not be evidence they can produce for this?

Was Simon Case, the cabinet secretary, or James Bowler, the Treasury permanent secretary, sounding the alarm?

Are there “ministerial directions” – letters formally objecting to previous Tory ministers’ spending decisions – consistent with Labour’s account of what happened, to show objectively the previous government was behaving as recklessly as Ms Reeves will assert?

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Will Mr Hunt say he was going to pay for the shortfall from the reserve?

The Treasury has a contingency for emergencies, known as the reserve.

Jeremy Hunt may have planned to raid the reserve. But how will Labour use the reserve in future? Will it promise not to do things in the same way? We may not find out on Monday, but it’s one for the future.

Where will the cuts come from

All we will get on Monday is certain spending cuts to the existing 2024/5 budgets in order to make up the in-year shortfall.

This will likely include the immediate suspension of road projects, such as the tunnel under Stonehenge, and the suspension of Boris Johnson’s 40 hospital building projects. This will trigger a big political bang, and likely upset some on their own side who are directly affected by cancellations. But this is only the start.

What – more cuts? And what budget to watch…

Yes. Some of the overspends identified today will have a knock-on effect on future years. And some of the budget shortfalls will be one-off or short-term revenue raisers.

We won’t know the full impact of the cuts until the spending review on the same day as the budget.

In particular, I understand Labour MPs should look at the welfare budget. That is something the Treasury has its eyes on, fearing it is ballooning out of shape.

So far all the messaging from cabinet ministers around welfare has been quite conciliatory – but tougher actions will have to be taken to rein in expanding budgets in short order.

Is the biggest strategic decision one that will be barely noticed today?

Ms Reeves will say there will be a spending review on the same day as the October budget.

Critically, this will be a one-year review rather than the three-year review which was being considered as recently as a month ago.

In other words, Ms Reeves will determine how much government departments have to spend shortly after the party conference, but has ducked doing a three-year spending review which would have covered most of the parliament so soon.

Why delay the big three-year spending review?

There are likely two big reasons for this.

First, a spending review should be a moment where every bit of spending by the Tories is examined, but with another spending review one year later the pressure is lower to go through expenditure line by line at breakneck speed. There’s a chance better decisions are made.

Secondly, the government could well face a fairly bleak forecast from the Office for Budget Responsibility, particularly given their decision to inherit fiscal rules. Deferring the main spending review for a year gives the chance for upgrades to growth forecasts meaning more cash is available for public services.

A settlement in the near future could be quite bleak indeed. Although forecasts can be downgraded as well as upgraded, and given the global turmoil likely in the coming months, nothing can be taken for granted.