UK Chancellor Rachel Reeves provoked fury among Conservatives on Monday as she accused them of covering up a near £22bn black hole in the public finances when they were in government.
The new Labour chancellor claimed her predecessor, Jeremy Hunt, had “lied . . . about the state of the public finances” and that government departments had inked in spend plans much higher than publicly disclosed.
What are the main reasons for the overshoot?
The single biggest driver was the new chancellor’s decision to accept public sector pay recommendations to raise salaries by about 5-6 per cent in 2024-25, which will add £9.4bn to spending this year.
More of a surprise was the scale of a £6.4bn spending overshoot on asylum and immigration, which was a direct result of the decision by the last government to stop processing “inadmissible” claims within the UK.
“Everybody outside knew this was expensive — no one knew how expensive,” said Jonathan Portes, an economics professor and former chief economist at the Cabinet Office. “People inside must have known.”
Spending during a fiscal year can sometimes overshoot earlier expectations and should normally be managed as part of the routine work of the Treasury, said Thomas Pope of the Institute for Government.
However, with the exception of the Home Office — which has regularly drawn on the government’s reserves to cover asylum costs in recent years — departments have typically been more likely to underspend than to exceed their limits.
Pope said the sums revealed were extraordinary. “I don’t think the scale of the spending we are talking about here is something you can find savings in the budgets for easily. It’s a real number and a big number.”
Was there a cover-up?
Many of the pressures on spending were well telegraphed, from warnings by the National Audit Office to parliamentary committees, think-tanks and shadow ministers. Reeves herself said before the election that Labour’s inheritance would be “the worst since the second world war”.
Yet on Monday, the chancellor claimed the situation was far worse than expected, citing the example of cash handed to rail companies to make up for passenger shortfalls without adequate budgeting. “That was unfunded and undisclosed,” she said.
Richard Hughes, chair of the Office for Budget Responsibility, said in a letter published on the same day that he had only been told of the spending pressures the previous week. Given the scale of the potential spending overshoot, the watchdog will now conduct a review into the preparation of its 2024-25 fiscal forecasts.
The biggest mystery, according to Paul Johnson and Ben Zaranko at the Institute for Fiscal Studies, is how the Treasury’s reserve fund, meant to cover “genuinely unforeseen, unaffordable and unavoidable pressures”, has been drained so early in the fiscal year.
The Treasury says £8.6bn has been spent on “normal reserve claims” in just three months but has not given a full breakdown of this spending.
Could civil servants have raised the alarm earlier?
One question is whether officials were open about the scale of the problems when the OBR was preparing its forecasts for the March Budget.
Portes said it was “inconceivable” that the asylum overspend “was not obvious to senior civil servants in both the Home Office and the Treasury”, and that it would be “astonishing” if they had not told ministers.
Department chiefs can seek a “ministerial direction” to proceed with a spending proposal when they are concerned over the cost, value for money or feasibility. However, there are no public records of permanent secretaries seeking an instruction over the spending highlighted by Reeves.
The prime minister’s spokesperson said this was a matter for individual permanent secretaries, but that all spending decisions were the responsibility of ministers.
Senior Conservatives plan to write to the permanent secretaries at the Home Office and Treasury, seeking public clarification over what they knew when they signed off on their departmental spending, and confirmation that they did not raise objections.
A separate question is whether James Bowler, the Treasury permanent secretary, should have warned Reeves of unfunded spending during access talks in the run-up to the election.
Lord Nick Macpherson, former Treasury permanent secretary, insisted officials had their hands tied when it came to raising red flags.
“I feel for HMT officials,” he said on X. “The rules precluded them sharing spending pressures with Ms Reeves ahead of the election; the current framework precluded them discussing the realism of spending plans with the OBR.”
Is the OBR at fault?
OBR boss Hughes has repeatedly underlined his frustration at the agency’s inability to challenge the spending plans set by the government.
The watchdog issues its own forecasts of how welfare spending is likely to evolve over time and does not always accept ministers’ claims about the savings likely to result from reforms.
But the OBR feels bound to take plans for day-to-day spending by departments as a matter of policy — even when it appears almost inevitable that their budgets will eventually need to be topped up.
It does have scope to question whether departments are likely to undershoot or overshoot their budgets in the short term but relies heavily on information from the Treasury to assess this.
Former Tory officials were critical of Hughes’s decision to weigh in on the day of Reeves’s statement to parliament with an announcement that he was reviewing the process.
How far will the reforms fix things?
Reeves is proposing three changes: to conduct spending reviews more regularly, revising them in the light of economic shocks; to formalise the OBR’s power to forecast departmental overspending; and to improve the transparency of the information the Treasury shares with the OBR.
Macpherson said the last of these in particular would be “a big step forward”.
Another former Treasury official said: “Giving the OBR greater information in the future and the power to disagree with the government spending forecast is pretty significant in terms of stopping this happening in future.”
But Zaranko from the IFS stressed that institutional changes would not solve the core issue, which is that departments had been told to absorb double-digit inflation and big public sector pay awards without funding to match.
Additional reporting by Lucy Fisher and Anna Gross