WHY IS REEVES FACING SUCH A BIG FISCAL HOLE
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Policy choices
Analysts stress that an important driver of the deterioration of the public finances will be policy choices made by Labour — on top of economic factors. “When the OBR breaks this down into policy measures and the underlying forecast, there will be a big chunk in the policy pile,” said Ben Zaranko, associate director at the IFS. “You could get comfortably into double-digit figures.” The government’s U-turn on welfare reforms, together with its decision to abandon planned cuts to winter fuel payments, will add more than £6bn to borrowing relative to the OBR’s March forecast.
The possible removal of the two-child benefit cap, as signalled by Reeves on Monday, could cost another £3.5bn. The two-child limit, introduced by the then Conservative government in 2017, restricts certain benefits to two children in a family, and many Labour MPs are keen to remove it.
Reeves has also made it clear she wants to take action to lower household costs — in contrast with the past year, where sharp rises in regulated utility prices were a source of inflationary pressure. Cutting VAT on energy bills or scrapping the environmental levy added to bills at present to help fund energy efficiency improvements could be routes to achieving this.
Reeves may be able to announce some spending cuts to offset such giveaways: on welfare, for example, by acting on plans to replace current contributory benefits with a new, time-limited form of “unemployment insurance”.
Whitehall efficiency drives could also yield small amounts, and Reeves could pencil in bigger savings of some £5bn if she announced a freeze on day-to-day spending for 2029-30 — a period not covered by plans set out in the spending review this year.