Prime Minister Sir Keir Starmer during his speech and press conference in the Rose Garden at 10 Downing Street on August 27, 2024 in London, England.
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LONDON — U.K. Prime Minister Keir Starmer on Tuesday told the nation that the upcoming October budget would be “painful,” as he paves the way for spending cuts to address what the government says is a £22 billion ($29 billion) financing shortfall.
“We have no other choice given the situation that we’re in,” Starmer said in a speech in the gardens of 10 Downing Street, the prime minister’s residence.
“Those with the broadest shoulders should bear the heavier burden, that’s why we’re cracking down on non-doms,” he added, referring to U.K. residents whose domicile is outside of the country for tax purposes.
“Those who made the mess should have to do their bit to clean it up, that’s why we’re strengthening the powers of the water regulator and backing tough fines on the water companies who have let sewage flood our rivers, lakes and seas,” Starmer said. “But just as when I responded to the riots, I’ll have to turn to the country and make big asks of you as well, to accept short-term pain for long-term good, the difficult trade-off for the genuine solution.”
Starmer’s Labour party took power in early July following a landslide election victory. The U.K. parliament is on a summer break between July 30 and Sept. 2, although the new government has been navigating challenges including a series of riots around the nation involving far-right groups and a capacity crisis in the prison system.
The Labour administration has meanwhile benefitted from the ongoing fall in inflation, which is hovering around 2%, from the start of interest rate cuts by the politically-independent Bank of England and from the economic return to growth for the past two successive quarters.
In its electoral manifesto, Labour said it would raise £7.35 billion ($9.71 billion) by 2028-29 to fund public services through measures including closing tax loopholes on nondomiciled individuals, removing tax breaks for independent schools, closing what has been described as a “tax loophole” for private equity investors, and introducing a “time-limited windfall tax” on oil and gas firms.
Starmer and Finance Minister Rachel Reeves have repeatedly stated they will prioritize economic growth and fiscal responsibility in their policymaking.
In his Tuesday speech, Starmer said the U.K.’s public finances were “worse than we ever imagined” and accused the previous government of masking a £22 billion “black hole.”
Labour announced the shortfall figure at the end of July and blamed it on overspending and poor budgeting by the previous Conservative government.
Former Finance Minister Jeremy Hunt in July wrote to Simon Case, the head of the British civil service, labeling Labour’s claims about the public finances “deeply troubling.”
Hunt said the alleged £22 billion gap differed from the “main estimates” for spending presented for approval before Members of Parliament on July 17. He added that the disparity in figures risked bringing the politically-neutral civil service into disrepute, since estimates are signed off by its senior officials.
The Institute for Fiscal Studies, an independent research group, has previously argued Labour was aware of the “broad outline” of the size of the deficit and was not upfront during the election campaign about the cuts and tax rises that would be needed to maintain public services.
“Growth — and frankly, by that I do mean wealth creation — is the number one priority of this Labour government,” Starmer said on Tuesday.
Starmer said he had not wanted to take the path to means test the Winter Fuel Payment, a payout for pensions, in a move that has been controversial even within his own party — but added that more “difficult” decisions would come.
Starmer said taxes would not rise for “working people” in the October budget, although he did not supply additional details. Labour has previously pledged not to increase value added tax, national insurance — a general taxation — or income tax.
The speech was criticized by politicians from other parties.
“Keir Starmer says cutting the winter fuel payment is a choice he had to make. But when asked about a wealth tax – Rachel Reeves said their spending commitments didn’t require extra investment. So his tough choices are to not tax wealth of billionaires,” Zack Polanski, deputy leader of the Green Party, said on social media network X.
Conservative politician Kemi Badenoch, a frontrunner to replace Rishi Sunak as party leader, said the speech showed that Starmer “campaigned on promises he couldn’t deliver and now he is being found out,” according to BBC News.
Liberal Democrats leader Ed Davey meanwhile stated that the Conservatives left a “toxic legacy” that needed “bold and ambitious action from the government to fix.”
CNBC has contacted the Conservatives for comment.
Financial markets and investors are still waiting for concrete announcements from the government, David Denton, technical consultant at investment management firm Quilter Cheviot, said in a note.
“During Labour’s election campaign, the party emphasised the various taxes it would not seek to raise, such as National Insurance, VAT, and income tax. Therefore, an increase in Capital Gains Tax (CGT) seems plausible,” Denton said. “An alignment with income tax rates or even a minimal increase might impact investor behaviour.”
He added, “Another potential problem is that unless anti-forestalling measures are announced with any plans, we could see a surge in property on the market as homeowners rush to sell investment properties before new legislation comes into place.”