The government inherited an unexpected £22 billion “black hole” in the public finances from the Conservatives.
A Treasury audit has forecast a £22 billion overspend in departmental day-to-day spending this year, but the extent to which this was unexpected or inherited is disputed. The Institute for Fiscal Studies says some pressures could have been anticipated, but others do “indeed seem to be greater than could be discerned from the outside”.
Labour’s claim that the government inherited a “£22 billion black hole” from the Conservatives has been at the heart of political debate since the election, and has dominated debate over the public finances in the run-up to next week’s Budget.
We’ve seen this figure used time and again by senior ministers, whether at Prime Minister’s Questions, during Labour party conference or elsewhere. In fact, our AI tools have picked up almost 400 mentions of the claim—a total which includes politicians repeating it and people responding to it, as well as other references to it in the media.
The Conservatives have strongly challenged the claim, however, this week describing it as a “myth”, while others such as the Institute for Fiscal Studies (IFS) have argued that some of the pressures contributing to the so-called “black hole” could have been anticipated.
With the upcoming Budget now just days away, this explainer takes a closer look at where the £22 billion “black hole” claim comes from, why it has been disputed, and what it might mean for government spending.
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In a statement in the House of Commons on 29 July, Chancellor of the Exchequer Rachel Reeves said that a Public Spending Audit conducted by the Treasury following the general election had found that the new government had “inherited a projected overspend of £22 billion”. She described this as a “£22 billion hole in the public finances” and “£22 billion of spending this year that was covered up by the Conservative party”.
The Treasury audit found that in 2024/25 “the forecast overspend on departmental spending is expected to be £21.9 billion above the resource departmental expenditure limit (RDEL) totals set by the Treasury at Spring Budget 2024”. (RDEL broadly refers to government departments’ budgets for day-to-day spending on the running costs of public services and administration).
The £21.9 billion was a net figure. Gross additional pressures totalling £35.3 billion were identified by the Treasury, and approximately £13.9 billion of these pressures were then offset by a combination of reserve funds and other allowances.
The additional pressures identified were as follows:
As the above list shows, the single biggest source of spending pressure came from a decision taken by Labour to accept recommendations for public sector pay awards in 2024/25, which the audit estimated would add “further pressure of £9.4 billion in 2024-25 on top of what the last government set aside for pay”. (This is because the most recent Spending Review held by the Conservative government provided for an increase of 2% in 2024/25, whereas the recommendations accepted by the government in July were broadly in the 5-6% range.)
Also published in July as part of the audit were a number of policy decisions taken by the incoming government which it said would deliver “£5.5 billion savings” in 2024/25.
These included identifying at least £3.2 billion in waste and efficiency savings within government departments to fund pay, cancelling a number of policies announced by the previous government (including several infrastructure projects, and plans to replace A-levels with the ‘Advanced British Standard’ qualification framework) and ending the Rwanda migration partnership.
The decision to restrict eligibility for the Winter Fuel Payment from this winter (which the audit estimated would save £1.4 billion in 2024/25) was also announced as part of these savings.
Taken together, the government says these savings reduce the forecast overspend from £21.9 billion to £16.4 billion, with further measures expected to be set out in the Autumn Budget. The extent to which these additional measures will take the form of tax increases or spending reductions is as yet unclear.
The Conservative party has pushed back on the £22 billion figure, with shadow chancellor Jeremy Hunt describing it as a “a political device to justify tax rises”, and pointing to the Treasury’s refusal to publish further information about the figure following a Freedom of Information request by the Financial Times.
As outlined above, the second biggest single source of additional pressures was listed as ‘normal Reserve claims’, This refers to department spending funded by Treasury reserves, rather than a department’s actual budget—but we don’t know what specifically was included in this figure.
Full Fact raised concerns about this in a letter to the chancellor ahead of the Budget in which we stressed the importance of honesty, openness and accountability.
The Fraser of Allander Institute (an economic research institute based in Scotland) wrote that based on publicly available data “it is hard to fathom how the £8.6 billion number was arrived at” and has called on the Treasury to publish data detailing the ‘normal Reserve claims’.
Much of the discussion surrounding the £22 billion figure has focused on Ms Reeves’s claim that the Conservative party “covered up” the true state of public finances ahead of the general election, with some experts criticising the previous government’s approach.
The Institute for Fiscal Studies has said that Ms Reeves “cannot claim to have been caught unawares by the broader fiscal challenge awaiting her on entering HM Treasury”, but also that “the extent of some of the pressures does indeed seem to be greater than could be discerned from the outside, and some of the previous government’s budgetary practices leave a lot to be desired”.
Concerns over the way in which day-to-day spending was set out by the previous government were also raised by the Office for Budget Responsibility (OBR), which has initiated a review of its March 2024 forecast of Departmental Expenditure Limits (DELs) in light of the Treasury’s findings. OBR chair Richard Hughes noted that he had previously expressed concerns over the “transparency and credibility of the existing arrangements within government for forecasting, planning, and controlling” day-to-day spending.
A letter to Mr Hunt from the Cabinet Secretary Sir Simon Case revealed that the former chancellor was told that the lack of a Spending Review (a process which sets out public spending plans for government departments) since 2021 had resulted in “sizeable in-year changes to spending plans in recent years”.
But, as has been noted elsewhere, Labour’s characterisation of this overspend as a “black hole” which must be met by either increased taxes or spending reductions is itself based on Labour’s fiscal rules, which state that day-to-day government spending costs must be met by revenues (that is, borrowing can’t be used to fund day-to-day spending).
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