What is the size of the 2025 Budget ‘black hole’?

Ahead of the Labour government’s second Autumn Budget on 26 November, it’s been widely reported that the chancellor Rachel Reeves MP will increase taxes in order to meet the cost of public spending.

Many of these reports have referred to a ‘black hole’ in the government’s finances. But what does this actually mean? We’ve taken a look at the fiscal picture ahead of the Budget, and the scale of the challenge experts say Ms Reeves could be facing.

What is a fiscal ‘black hole’?

‘Black hole’ is a colloquial term that’s used widely in the media and by politicians to describe a gap in the public finances. While there’s no official definition, in this context a black hole refers to the difference between the amount the government is forecast to spend and the amount it’s forecast to receive in revenue. This is also referred to as a budget shortfall or deficit.

Estimates we’ve seen in recent months put the current government’s own ‘black hole’ at anywhere between £20 billion and £50 billion, though some of these estimates combine the projected budget shortfall with the government’s current fiscal headroom.

‘Black hole’ is also a phrase we’ve heard repeated many times by the Labour government since it came to power, most notably when it claimed the previous government had left a “£22 billion black hole” in the public finances. In this instance, Labour was referring to what it said was an in-year overspend in departmental day-to-day spending compared to what was set out in the Conservatives’ last Budget.

Why does it matter?

The government has imposed on itself a set of fiscal rules that constrain decisions on taxes and public spending. These are:

• that day-to-day spending costs are met by the government’s revenues
• that debt must fall as a share of the economy by the fifth year of any Office for Budget Responsibility (OBR) forecast (currently 2029/30).

Labour has repeatedly promised not to break these rules.

Governments have set their own fiscal rules since 1997, though these have changed multiple times. Last year, Ms Reeves herself changed the measure of public debt used in one of the fiscal rules. Some rules have not been met by previous governments.

The Institute for Government (IfG) notes that having fiscal rules in place can signal to financial markets that a government “is committed to fiscal discipline and will repay their creditors in full, thus reducing the risk premium a country faces”, and that breaking fiscal rules can, for example, lead to higher interest rates and political costs.

In both her Autumn Budget 2024 and Spring Statement 2025, Ms Reeves left the government with £9.9 billion of fiscal headroom—the amount of money a government ensures it has to act as a financial buffer so it can increase spending or reduce taxes without breaking its rule to meet all day-to-day spending with revenue (as opposed to borrowing).

In theory, more fiscal headroom suggests a government can be more reactive to emergency situations and economic downturns.

The average amount of fiscal headroom left by chancellors has decreased since the Covid-19 pandemic. This means Ms Reeves has less space to make changes to spending or revenue while still meeting her fiscal rules.

Taken together, this means that any shortfall in government spending plans (that is, if government spending is forecast to increase beyond what can be accommodated by its fiscal headroom) would have to be met either by reducing public spending, or increasing taxes.

Changes to the government’s policies and spending since the last Budget and the Spring Statement, such as the government’s u-turn on winter fuel payments, as well as changes to forecasts for government revenue from taxes, and other factors such as higher borrowing costs, have chipped away at this fiscal headroom.

How big is the government’s ‘black hole’?

We don’t have an official figure for how much of a shortfall the government may have found itself facing since the Spring Statement. But we’ve seen several estimates based on changes in spending and forecasts for things like the UK’s GDP growth, productivity and wage growth—all of which impact the revenue the government can expect to receive in coming years.

For example, well-publicised u-turns on changes to Winter Fuel Payment eligibility and reductions in disability benefit spending mean the savings from these policies that were factored into previous forecasts will no longer be made in full.

If economic forecasts change, as is widely expected, the government may also receive less than it thought from taxation, or see weaker economic growth. In particular Ms Reeves herself recently acknowledged: “It is already clear that the productivity performance [...] is weaker than previously thought”, which suggests output will be lower than previously forecast, and there may be “lower tax receipts”.

In short, the government is finding itself spending more, but bringing in less revenue than previously forecast.

In August, the economic think tank the National Institute of Economic and Social Research (NIESR) forecast the chancellor would face a shortfall of £41.2 billion in the 2029/30 financial year, and the government would not meet its fiscal rules without “substantial adjustments” in this year’s Autumn Budget. It said this figure represents “a significant overshoot in day-to-day spending relative to tax revenues”.

NIESR said this shortfall was due to “higher-than-expected borrowing and lower-than-expected growth”, as well as the government’s failure to pass its welfare reforms in full.

If the government was to make up this £41.2 billion, from either tax increases or spending reductions, and it also wished to retain fiscal headroom of £9.9 billion, it would need to find a total of £51.1 billion in the Budget. (To be clear, these figures are estimates).

Some reporting of NIESR’s figure referred to this total as the ‘black hole’ facing the government, rather than just the shortfall.

On the day NIESR’s report was published, the Prime Minister Sir Keir Starmer said: “Some of the figures that are being put out are not figures that I recognise.” In September, Ms Reeves rejected the figure.

Others suggested different figures for the size of the ‘black hole’. In October, Sky News estimated it was £32-£39 billion, taking into account the need for fiscal headroom as well as expected forecast downgrades, debt interest costs, policy u-turns, and potential increased spending on things like NHS redundancy payments and lifting the two-child benefit cap.

Since these estimates were published it’s been reported that the OBR has improved its forecast for this year’s Budget, partly due to “stronger wage performance” and “the strength of receipts”, which could help counter an expected downgrade in productivity. This improved forecast could leave the shortfall at £20 billion (if combined with the loss of fiscal headroom, this would suggest a total of around £30 billion).

In November, the Institute for Fiscal Studies (IFS) estimated the “fiscal tightening needed at the Budget” could be around £22 billion, if the chancellor were to keep her headroom, depending on what happens with the wider economy.

The IfG has said that changes to the OBR’s forecasts could see the government’s fiscal position in 2029/30 “worse than previously expected by somewhere in the region of £10bn to £20bn before any new policies are considered”.

The Resolution Foundation has recently said it thinks higher interest costs on the government’s debt could add £6 billion to the government’s borrowing, and that policy u-turns since the Spring Statement in March amount to £7 billion.

In her Budget, the chancellor is facing what NIESR have called “an impossible trilemma”, as it believes she can’t simultaneously fulfil the government’s spending commitments and meet the government’s fiscal rules, while not breaking manifesto promises “to avoid tax rises for working people”.

But we won’t know exactly how Ms Reeves will negotiate this until she takes to the despatch box in the House of Commons on 26 November, and we won’t know how the OBR’s forecast will change until it’s released that day.