Ministers are being asked to draw up billions of pounds in cuts to infrastructure projects over the next 18 months despite Rachel Reeves pledging to invest more to grow the economy, the Guardian has learned.
Members of the cabinet have been asked to model cuts to their investment plans of up to 10% of their annual capital spending as part of this month’s spending review, government sources said.
The demands would mean big projects such as hospital improvements, road building and defence projects being slowed down or stopped altogether as the government looks for ways to repair what they say is a £22bn black hole in the public finances.
Economists warn that such cuts to capital spending could end up damaging the economy and Britain’s creaking public infrastructure.
Reeves, the chancellor, told the Labour party conference last week: “It is time the Treasury moved on from just counting the costs of investment in our economy to recognising the benefits too. Growth is the challenge and investment is the solution.”
But Treasury officials argue that cutting spending on infrastructure in the short term is the only way to repair the gap quickly.
One Whitehall source said: “We’re being told the Treasury wants to borrow more to invest in the long term but that does not cover the fact we’re being asked to make major capital spending cuts this year and next.” The Treasury declined to comment on the spending review process.
Reeves will announce her first budget as chancellor on 30 October. It is expected to include a number of tax rises to help fund public services.
At the same time, she will also set out how much each department has to spend for the rest of this financial year and the next as she tries to plug the gap between the government’s revenues and its expenditure.
Ministers blame the previous Conservative government for this gap, which was partly caused by much higher spending on hotels for asylum seekers than planned. Countering this narrative, senior Tories say Labour spent more than they would have done to settle public sector pay disputes, accounting for as much as £9bn of the deficit.
Economists say a large part of the problem is that departmental spending limits were last set three years ago, before inflation soared and the numbers of asylum seekers rose significantly.
To close the gap, the Treasury is asking ministers to model capital spending cuts to areas such as hospital building, defence infrastructure and road and rail networks. Treasury officials say delaying or stopping projects that have not yet begun is easier than changing welfare schemes that are already in place, or making large-scale redundancies.
Labour has already said it will review the last government’s plans to build 40 new hospitals, which the prime minister, Keir Starmer, has described as an unfunded commitment.
Darren Jones, the Treasury chief secretary, recently sent “indicative budgets” to departments to give them a sense of the scale of cuts the government wants to make in this financial year and next. Last week he began face-to-face talks with ministers to thrash out the details of exactly how much each department would be required to save and how.
These indicative budgets have infuriated some ministers, who think the Treasury is once more prioritising short-term financial control rather than the country’s long-term economic interests. Many economists also argue Reeves and Jones should look elsewhere for immediate savings, even if they prove trickier to find.
Some in Whitehall argue that the capital spending cuts will be particularly difficult to sell to the public given Reeves is simultaneously making the case for more government investment in the long term to boost growth.
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The chancellor is working on plans to change the government’s definition of debt to allow her to borrow billions more to spend on capital projects while sticking to her pledge of having debt begin to fall in five years’ time.
But officials say that will not alleviate the immediate pressures that have to be tackled in this year’s spending review.
Talks between the Treasury and Whitehall departments will continue until shortly before budget day, with ministers hoping to reduce the demands before then.
Ben Zaranko, a senior research economist at the Institute for Fiscal Studies thinktank, said: “Capital budgets are often the first place governments go when they need to find quick savings. It’s easier to cancel a building project that hasn’t started yet than it is to lay off staff.
“But these cuts add up over time, and are one reason why our public services are less efficient than we might like, and why large parts of the public realm are in such a dire state.”
Tom Railton, director of the Invest in Britain campaign, said: “The only way to end the UK’s economic stagnation, fix our crumbling public services and ensure climate targets are met is to increase public investment. Not only do leading economists agree, the public does, too.
“We need more public investment, not less – and a fiscal framework that supports long-term planning, not short-term bookkeeping.”
Mel Stride, the shadow work and pensions secretary, said: “If the government comes forward with plans to cut vital productivity-boosting investment then that is a cause for real concern.
“The fiscal rules are deliberately focused on a five-year horizon to avoid making sudden cuts of this kind. We should be finding ways to increase capital funding, not reduce it.”