Rachel Reeves paves way for cuts and tax rises to fill shortfall left by Tories

Rachel Reeves will lay the ground for cuts to public spending, tax rises and delays to some major infrastructure projects on Monday as she sets out the toxic inheritance the Labour government inherited from the Tories.

She is expected to pause work on a string of infrastructure projects, including Boris Johnson’s flagship plan to build 40 new hospitals and the proposed two-mile road tunnel bypassing Stonehenge.

Reeves will unveil a “Office of Value for Money”, an arm’s-length body that will use civil service resources to immediately start identifying and recommending savings for the current financial year.

She will say surplus publicly owned property will be sold and action will be taken straight away to stop “non-essential” spending on consultants.

A Treasury source said Monday’s announcement was not about “a return to austerity”, but about repairing the damage of “14 years of unfunded promises”, which had left a £20bn hole in government spending for essential public services.

The Guardian reported on Friday that Reeves was to approve above-inflation pay rises for millions of public sector workers, with teachers and NHS staff in line for a 5.5% pay rise costing approximately £3.5bn more than had been budgeted for. The pay rises are seen as necessary to avoid the costs to the economy seen in the waves of strike action under the last government.

“Before the election, I said we would face the worst inheritance since the second world war,” Reeves will say on Monday. “Taxes at a 70-year high. Debt through the roof. An economy only just coming out of recession. I knew all those things. I was honest about them during the election campaign. And the difficult choices it meant.

“But upon my arrival at the Treasury three weeks ago, it became clear that there were things I did not know. Things that the party opposite covered up from the country.”

Labour’s manifesto committed not to raise taxes on working people, relying instead on economic growth to improve government funds. Labour has ruled out hikes to income tax, VAT, national insurance and corporation tax, leaving changes to capital gains tax, inheritance tax and pensions relief on the table.

Environment secretary Steve Reed on Sunday refused to say if Labour would consider those taxes to plug the funding gap, but said: “We’re not going to shy away from difficult decisions.”

Paul Johnson, the director of the Institute for Fiscal Studies, said it seemed “pretty likely” Labour would raise taxes in some form, claiming the £20bn hole could be filled “by reversing the national insurance cuts Jeremy Hunt made in his last two budget statements”. “If it weren’t for the politics that would be the most straightforward thing to do,” he told Times Radio.

Other leading economists suggested the government could “raise a few billion pounds from reforms to capital gains tax and inheritance tax”.

Reeves will announce that an Office for Budget Responsibility forecast would coincide with a budget and spending review later this year, the date of which will be announced on Monday.

She will commit the government to one major fiscal event each year to end “surprise budgets”, which have previously caused uncertainty for the markets and family finances across the country.

She is expected to scrap or scale back a number of large infrastructure projects, including the £500m Restoring Your Railway Fund, the £1.7bn A303 dual carriageway Stonehenge bypass and the A27 Arundel bypass in West Sussex.

Reeves will say: “It is time to level with the public and tell them the truth.

“The previous government refused to take the difficult decisions. They covered up the true state of the public finances. And then they ran away. I will never do that.

“The British people voted for change and we will deliver that change. I will restore economic stability. I will never stand by and let this happen again.

“We will fix the foundations of our economy, so we can rebuild Britain and make every part of our country better off.”

Related: Rachel Reeves urged to crack down on wealthy tax avoiders

Liberal Democrat Treasury spokesperson Sarah Olney MP said it was clear the British economy was “in desperate need of repair” after years of Conservative party incompetence.

Gareth Davies MP, shadow exchequer secretary to the Treasury, said Reeves was “trying to con the British public into accepting Labour’s tax rises”.

“She wants to pretend that the OBR, established by the Conservatives and whose forecasting was used in all of the last Conservative governments budgets, doesn’t exist in order to make any of what she says believable and just like her books, this announcement is a copy and paste of what has come decades before.

“But her words and actions on supposedly saving the taxpayer money are an insult when she is secretly planning to raise their taxes at the same time.”