Rachel Reeves has told the cabinet that the UK still faces a £100bn black hole in the public finances over the next five years amid concerns that ministers are yet to grasp the full scale of the fiscal deficit ahead.
At a meeting of the political cabinet, the chancellor said the £22bn gap this year – which the government has blamed on their poor economic inheritance from the Tories – would be a recurring cost each year of this parliament.
Cabinet ministers have pushed back against some of the cuts demanded of them, in particular to in-year capital spending, and Reeves’s words will be interpreted as a signal that she will not back down.
“The chancellor highlighted the £22bn black hole inheritance from the previous government that needed to be filled just to keep public services standing still,” a Labour spokesperson said.
“She said that the scale of inheritance meant there would have to be difficult decisions on spending, welfare, and tax – and that the long-term priority had to be unlocking private sector investment to drive economic growth.
“The chancellor told cabinet the budget would focus on putting the public finances on a strong footing and being honest with the British people about the scale of the challenge.”
Treasury sources said internal calculations showed that the huge in-year sum, which Reeves announced in July, was a conservative estimate of the amount of money needed to cover the cost of areas including public sector pay, support for Ukraine and the asylum system.
“Ministers do kind of know that we’ll need to fix the black hole every year, but because they see these things through the lens of their own departments, it feels they haven’t really clocked that the scale of the challenge at the budget is so much worse than we expected,” a source said.
The downbeat assessment came with a warning that “this is not a budget for rabbits”, with government aides trying to manage expectations of what the chancellor will be able to deliver in her long-awaited first fiscal statement.
Instead, the budget will be presented as a longer-term down payment on “fixing the foundations” of the country, as the government uses all the levers at its disposal to grow the economy.
Ministers have signalled that the government is pushing ahead with plans to borrow tens of billions of pounds extra for infrastructure investment by changing how it calculates the fiscal rules.
Areas for capital spending were expected to include rail and roads, money to invest alongside businesses such as gigafactories and renewable energy projects, and more investment in improving schools and hospitals.
At the same time, Reeves is expected to reaffirm Labour’s fiscal rule that there will be no borrowing for day-to-day spending, rebranding it their “golden rule”, to shore up confidence in the markets.
It is an echo of Gordon Brown’s guideline that over the economic cycle, the government would borrow only to invest and not to fund current spending.
