UK's Starmer warns of 'painful' October budget to tackle public finances

Prime Minister Keir Starmer giving a speech and press conference in the Rose Garden at 10 Downing Street, London, Britain, on 27 August 2024.

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LONDON British Prime Minister Keir Starmer told the nation on Tuesday that the upcoming October Budget would be “painful”, paving the way for the government to cut spending to plug a £22 billion ($29 billion) budget shortfall.

“Given the circumstances we find ourselves in, there is no other choice,” Starmer said in a speech in the garden of 10 Downing Street, the prime minister's official residence.

He added: “Those with the broadest shoulders should bear a greater burden. That's why we are stepping up our crackdown on non-residents living overseas who are UK residents for tax purposes.”

“Those who have made the mess must do their part to clean it up, which is why we are supporting stronger powers for water regulators and stiffer fines for water companies that allow sewage to overflow into our rivers, lakes and oceans,” Starmer said. “But just as I responded to the riots, I will also have to rely on the nation to make big demands on you – to accept short-term pain for long-term gain, and to make difficult compromises for real solutions.”

Starmer’s Labour Party took power in early July following a landslide election victory. The British parliament is in summer recess from July 30 to September 2, but the new government is dealing with challenges including a series of riots across the country involving far-right groups and a prison system capacity crisis.

The Labour government has benefited from a steady decline in inflation, which currently hovers around 2%, the politically independent Bank of England starting to cut interest rates and the economy returning to growth for the second consecutive quarter.

Labor's election manifesto said it would raise $7.35 billion by 2028-29 to fund public services, including by scrapping the tax loophole for non-residents, scrapping tax relief for private schools, removing what it described as a “tax loophole” for private equity investors and introducing a “limited-term windfall tax” for oil and gas companies.

Starmer and Chancellor of the Exchequer Rachel Reeves have repeatedly said they will prioritise economic growth and fiscal responsibility in their policy decisions.

Starmer said in a speech on Tuesday that Britain's finances were “worse than we ever imagined” and accused the previous government of covering up a $22 billion “black hole”.

Labour released its budget shortfall figures at the end of July, blaming the previous Conservative government's overspending and budget shortfalls.

Former Chancellor of the Exchequer Jeremy Hunt wrote to the head of the UK Civil Service, Simon Case, in July, describing Labour's claims about public finances as “deeply concerning”.

Hunt said the $22 billion gap differs from the “main estimate” of spending presented to lawmakers for approval on July 17. He added that because the estimates are signed off on by senior officials, the differences in figures risk damaging the reputations of politically neutral officials.

The Institute for Fiscal Studies, an independent research group, previously claimed Labor knew “broadly” the size of the deficit but failed to publicly outline the cuts and tax increases needed to maintain public services during the election campaign.

“Growth, frankly speaking, when I say growth, wealth creation, is the number one priority of this Labour government,” Starmer said on Tuesday.

Starmer said he did not want to go down the path of financially testing the pensioner's winter fuel payment, which has been controversial even within his own party, but added it would make for a more “difficult” decision.

Starmer said there would be no tax rises on “working people” in his October Budget, but gave no further details. Labour had previously promised not to raise VAT, national insurance premiums or income tax.

The speech drew criticism from politicians from other parties.

“Keir Starmer said cutting winter fuel charges was a choice he had to make. But when asked about wealth tax, Rachel Reeves said there was no need for additional investment in her spending pledge. So his tough choice is not to tax billionaires’ wealth,” Green Party deputy leader Jack Polansky said on social media network X.

According to BBC News, Conservative politician Kemi Badenoch, a leading candidate to succeed Sunnack as party leader, said the speech showed that Starmer “campaigned on promises he couldn't keep and now his whereabouts are being exposed”.

Meanwhile, Liberal Democrat leader Ed Davey said the Tories had left a “toxic legacy” which the government must “take bold and ambitious action to fix”.

CNBC has reached out to the Conservatives for comment.

David Denton, a technology consultant at investment management firm Quilter Cheviot, wrote in the article that financial markets and investors are still waiting for concrete announcements from the government.

“During the Labour election campaign, they highlighted a number of taxes they would not raise, such as national insurance, VAT and income tax. So it seems reasonable to raise capital gains tax (CGT),” Denton said. “Even a rate that is in line with income tax or at a minimal rate could have an impact on investor behaviour.”

“Another potential concern is that unless the forest closure prevention measures are announced with some kind of plan, there could be a surge in properties on the market as homeowners rush to sell their investment properties before the new laws come into effect,” he added.

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