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The chancellor is set to announce billions of pounds in immediate cuts, aimed at plugging a £20 billion black hole in the public finances, when she addresses parliament on Monday.
Rachel Reeves’ plans are expected to include cancelling some road and rail projects, cutting spending on external consultants and seeking to cut waste in the public sector.
The previous government will be accused of “covering up” the deficit in the ministries’ budgets and then “escaping.”
But the Conservative Party said the chancellor’s message was aimed at “deceiving the British public” so she could raise taxes.
The Treasury’s internal audit of public finances is due to be published on Monday and is expected to show a gap of around £20bn between tax revenues received and expected spending.
The chancellor will tell parliament that this requires “immediate action” to restore economic stability and “repair the foundations of our economy”.
Projects that could be paused or cancelled include the road tunnel under Stonehenge, Boris Johnson’s new hospital programme and the Euston section of high-speed rail line 2.
Before the election, leading economists warned that the amounts were uneven, and that the new government would face a difficult choice between raising taxes, cutting spending, or abandoning its commitments to reduce debt in the medium term.
But the new government said it had found the situation worse than expected, describing it as “catastrophic”, with additional demands on the government treasury revealed as new ministers scrutinise their departments’ accounts.
Ms Reeves is said to be “really shocked” by some of the results.
But she would not suggest at this stage that tax increases would be necessary.
Instead, it will call on the Office for Budget Responsibility to conduct an assessment of public finances. It will also start the Spending Review, which looks at departments’ longer-term budgets.
Budgets or similar financial events will be held only once a year, and Ms. Reeves is expected to schedule her first meeting in the fall.
Insiders point out that if the chancellor had wanted to raise taxes, she would have held an emergency budget this week, but instead she will reaffirm her commitments in the election manifesto not to raise personal tax rates, including income tax.
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Ms Reeves is also expected to announce that some public sector workers will receive pay rises in line with recommendations from independent pay review bodies. That means teachers, members of the armed forces and prison staff, among others, getting their salaries in line with inflation, but it also means finding the money to pay them.
The adviser is said to believe the cost of financing the deals must be balanced against the cost of disruption to the economy caused by strikes and the cost of failing to recruit and retain staff.
The Chancellor will also announce the creation of a new “Office of Value for Money” that aims to identify and recommend savings, including in the current financial year, so that “poor value spending is cut before it starts”.
Last week, UK Home Secretary Yvette Cooper said the Conservative plan to deport asylum seekers to Rwanda had cost taxpayers £700m, almost double the cost previously in the public domain.
Other departments have identified spending needs that are not covered by current budget plans. On Sunday, Environment Secretary Steve Reid said his department had found the state of flood defences was “much worse than we thought”.
The Conservative Party said the state of the public finances was clear before the election.
Former Conservative Chancellor of the Exchequer Jeremy Hunt accused the new government of “peddling nonsense”. “The books are wide open and what they show is a healthy and growing economy,” he said.
Shadow Chancellor Gareth Davies said:[Ms Reeves’] “Her words and actions about saving taxpayers money are an insult when she is secretly planning to raise taxes at the same time.”