Sir Keir Starmer has warned his senior ministers they will have to live with swingeing spending cuts after a cabinet row over the Budget erupted in public.
The prime minister is facing a backlash from Angela Rayner and other members of his top team over cuts to government departments set to be unveiled by the chancellor, Rachel Reeves.
Sir Keir has received letters raising concerns after a number of his team – including transport minister Louise Haigh and justice minister Shabana Mahmood – spoke out against the measures at Tuesday’s cabinet meeting, with one reportedly describing the cuts being sought as “absolutely huge”.
In response, on Thursday the PM’s official spokesperson warned: “Not every department will be able to do everything they want to. There will be tough decisions taken [and] tough conversations.”
They also warned that “public services and departments have to become more productive and public services will need reform”.
Some departments are facing cuts of as much as 20 per cent as Ms Reeves scrambles to find £40bn of spending cuts and tax rises before the 30 October Budget.
On Thursday Whitehall’s total overall budget, known as the “spending envelope”, was submitted to the Office for Budget Responsibility (OBR) after being finalised by Downing Street.
But tense negotiations with individual government departments are still ongoing, as they press for cash from other parts of Whitehall.
Danny Shaw, a former adviser to home secretary Yvette Cooper, said cuts of up to 20 per cent would be “devastating” to a department like the Ministry of Justice and would “destroy the criminal justice system in many ways”.
He told BBC Radio 4’s Today programme: “It’s hard to see how you could make cuts like that to the Ministry of Justice without affecting the running of the justice system in terms of prisons and probation which account for about half of net spending and legal aid, which is really on its knees at the moment, and also the courts and tribunal system which are, as we know, completely blocked.”
Ms Reeves told ministers during Tuesday’s cabinet meeting that plans to fill a £22bn hole in the public finances will be enough only to “keep public services standing still”.
Having promised “no return to austerity” under Labour, Ms Reeves is seeking the additional £18bn to fund a cash injection for the NHS and avoid real terms cuts to some key departments.
Concerns are thought to reach across the cabinet, with particular fear among those outside of health, defence and education whose departmental spending is not protected.
But even the education secretary Bridget Phillipson said that all cabinet ministers were facing “very tough choices”.
Experts have argued that ministers need to find £20bn to avoid a squeeze on “unprotected” departments pencilled in by their Tory predecessors, and billions more to prevent a sharp fall in investment spending.
Some of the money could come from changing the measure the government uses to calculate debt, but economists from the Institute for Fiscal Studies (IFS) have suggested that some tax rises are inevitable to prevent cuts to day-to-day spending.
The backlash came as it emerged Ms Reeves will use her Budget to increase capital gains tax on the sale of shares and other assets but will not change the rate for second homes.
Capital gains on profits from the sale of shares, which is currently levied at 20 per cent, is likely to rise by “several percentage points”, The Times reported, a move which would raise billions. It is also widely expected the chancellor will hike the employer rate of national insurance. An increase in the rate by 1p could raise up to £17bn, according to IFS director Paul Johnson.
But the move would be seen as a breach of Labour’s election manifesto, which promised: “Labour will not increase taxes on working people, which is why we will not increase national insurance.” Ministers have argued the promise only applied to the employee rate of national insurance, which sits at 8 per cent, and not the 13.8 per cent employer contribution rate.
On Tuesday former Bank of England governor Mervyn King, who was once Ms Reeves’s boss, called for the chancellor to bite the bullet and hike national insurance at the Budget.
In an open letter published by The Independent, Lord King told the chancellor to “keep it simple and be ruthlessly honest with the public”.
He warned Ms Reeves against higher borrowing to plug the gap in the public finances, advising her to turn to national insurance to pay for investment in the economy to boost growth.