Reeves moves fast to tackle £22bn budget shortfall ‘covered up’ by Tories

Rachel Reeves has cut winter fuel payments for 10 million wealthier pensioners as she sought to plug a £22bn black hole in the public finances she said was “covered up” by the Conservative government, while hinting at tax rises in her first autumn budget.

The chancellor also shelved the long-delayed cap on what people would pay for social care as she ignited a bonfire of Tory policies she said would be needed to deal with the deficit, telling MPs: “If we cannot afford it, we cannot do it.”

Yet almost half of the shortfall, £9.4bn, was a result of her decision to fund above-inflation public-sector pay recommendations in full, helping to reverse years of declining wages and see off the threat of industrial action.

Her response to a Treasury internal audit commissioned by Labour within days of taking office heralds a brutal first budget on 30 October, when she is expected to increase some taxes as well as cutting welfare and public spending.

“We don’t want to increase taxes but we are in a position where there was a £22bn gap between the money the previous government spent and what they budgeted for, and so we are going to have to make difficult decisions,” she told a Treasury press conference.

In a further sign that tough measures are being planned for the budget, the Treasury document outlining the shortfall stated that her plan for Whitehall departments to make £5.5bn of in-year savings would not be sufficient.

“The government is setting out further steps to tackle the spending pressures that remain and to take the difficult decisions necessary to secure the public finances,” it added.

Jeremy Hunt, Reeves’s predecessor as chancellor, said she would “fool absolutely no one” with the financial audit and accused her of a “shameless attempt” to lay the groundwork for tax rises in her autumn budget.

In a deeply political statement, Reeves pointed the finger of blame at the Tories while ruling out raising income tax, national insurance or VAT – keeping to the commitments made in Labour’s election manifesto.

“Upon my arrival at the Treasury three weeks ago, it became clear that there were things that I did not know, things that the party opposite covered up; covered up from the opposition, covered up from this house, covered up from the country,” she told MPs.

Reeves blamed the £22bn financial hole on the soaring bill to deal with asylum claims and illegal immigration, costing £6.4bn this year alone, along with extra spending on the NHS, the Ukraine crisis and maintaining roads and railways.

Support for her claim that there had been significant overspending in the dying days of the previous government came from the independent Office for Budget Responsibility, which launched a review into how the departmental spending totals for this spring’s budget were reached.

Richard Hughes, the OBR’s director, said he had only become aware of the upward pressures on spending last week.

The number of pensioners receiving the winter fuel payment will be cut from 11.4 million to 1.5 million as a result of the decision to means test a benefit worth up to £300 for a household with at least one member aged over 80.

The Treasury said the bill for the payment – introduced by Gordon Brown in his first budget after Labour’s 1997 – was currently £2bn a year. The change will come into force this winter and will save £1.5bn in the next financial year.

Reeves said Labour would show its commitment to pensioners by maintaining the triple lock, under which the state pension increases each year in line with earnings or inflation, or a minimum of 2.5%.

Morgan Vine of the charity Independent Age said: “Today’s decision to end the winter fuel payment for those not receiving pension credit risks driving hundreds of thousands of older people into further financial hardship.

“We welcome the chancellor’s intention to tackle the low uptake of pension credit, but means testing the winter fuel payment now will mean too many older people will fall through the cracks and not get the vital financial support they desperately need, especially when household bills like energy are still extremely high.”

Reeves will save a further £1bn next year by not going ahead with reforms to social care proposed by Sir Andrew Dilnot . These would make the means test for local authority support more generous and raise the capital limit – the amount in savings that means an individual is eligible for local authority care – from £23,500 to £100,000.

In response to furious shouts from the Tory benches on the issue, she responded: “I can understand why members are angry. I am angry, too. The previous government let people down.”

The Treasury said £9.4bn of the upward pressure on spending this year was the result of the chancellor’s decision to meet the recommendations of the public sector review bodies in full .

The cost does not include the proposed 22% deal for junior doctors , which arrived too late to be included in the Treasury analysis.

Paul Johnson, the director of the Institute for Fiscal Studies, said: “At a time when private sector earnings are growing by between 5% and 6% a year, public sector pay awards were always going to come in higher than the 2% budgeted by departments. That is a pressure that was known.”

The Treasury said 20% VAT on private school fees would be introduced on 1 January but that parents who pre-paid their fees in an attempt to avoid the additional cost would still have to pay.

Among the Tory projects to be scrapped are the “advanced British standard”, announced by Rishi Sunak last year to replace A-levels and T-levels, which was forecast to cost £200m next year although no money was set aside to pay for it.

Boris Johnson’s long-promised 40 new hospitals and various road projects will be reviewed in order to produce a more realistic timetable. But the Stonehenge tunnel on the A303, the A27 Arundel bypass and the “restoring our railways” scheme will be axed.