Supermassive black hole: how big is the fiscal challenge facing Rachel Reeves?

In the lead-up to the Autumn Budget we’ve seen a number of seemingly conflicting claims being made about the size of a so-called ‘black hole’ in the UK’s public finances.

Over the past few months Labour has repeatedly claimed to have inherited a “£22 billion black hole” from the previous government. 

But more recently some other figures have emerged, including claims that Chancellor of the Exchequer Rachel Reeves MP said there would be a “£100 billion black hole” over the next five years, and that there is actually a “£40 billion black hole” in the public finances.

Figures like these used on their own have limitations. The way they are presented is a crucial part of how they are interpreted and understood by the public. If figures are presented without context or caveats, they can give an incomplete or misleading picture.

This article will explain what these new figures refer to, and why Labour’s claims about future “black holes” don’t tell the whole story about the public finances.

“£22 billion black hole”

We’ve already written a lot about this figure. It comes from a Public Spending Audit published by the Treasury in July which 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 budgets for day-to-day spending on the running costs of public services and administration by government departments).

It said this stemmed from a series of “unfunded policy decisions”, the impact of higher than expected inflation, increased pressures on public spending due to global events and public sector pay rises (with around 40% of the figure accounted for by public sector pay awards in 2024/25—a decision taken by the Labour party).

The Audit also announced a series of policy decisions taken by the incoming Labour government to offset around £5.5 billion of this overspend, most notably including changes to Winter Fuel Payment eligibility.

This implies a shortfall of around £16.4 billion in the current year, before any further measures are announced in the Autumn Budget.

“£100 billion black hole”

An article published in the Guardian on 15 October claimed that “Rachel Reeves has told the cabinet that the UK still faces a £100bn black hole in the public finances over the next five years”.

We’ve contacted the Treasury to ask whether Ms Reeves used this specific figure. A readout from the political cabinet held on 15 October said that she had “highlighted the £22bn black hole inheritance from the previous government that needed to be filled just to keep public services standing still”, with the Guardian claiming Ms Reeves had said the figure “would be a recurring cost each year of this parliament”.

Regardless of where this figure originated, it’s important to be clear that the situation Labour claims to have inherited—a £22 billion shortfall in 2024/25—will not necessarily reoccur each year.

Instead, Ms Reeves appears to be referring to the fact that, as the Institute for Fiscal Studies (IFS) has said, it appears likely that some of the spending pressures which led to the £22 billion overspend in 2024/25 identified in the Public Spending Audit will be permanent.

But that doesn’t mean there will automatically be a “black hole” of this size in the public finances each year—because whereas these pressures weren’t covered by existing budgets this year they will now presumably be taken into account by the Treasury when setting out its spending plans going forward.

“£40 billion black hole”

As we’ve previously explained, the £22 billion is the forecast shortfall against current departmental spending plans this year.

But the £40 billion figure refers to the amount that Ms Reeves is reportedly aiming to make in combined tax increases and spending reductions in the upcoming Autumn Budget to ensure departmental spending does not see real-terms reductions.

Sky News cited “people close to the budget” suggesting “the gap in funding identified by the chancellor is more than twice what was previously thought.” But this could cause confusion, as the £40 billion figure is not a revised version of the £22 billion figure used by Labour previously.

Experts have been warning since before the election that the new government would need to find several billions of pounds worth of tax increases or spending reductions to achieve its fiscal target of funding day-to-day spending using revenue.

Current forecasts for future years are based on broad plans for overall public spending set out by the previous government. These assume day-to-day funding for public services will grow by 1% per year in real terms.

It’s important to note that this figure refers to overall public spending—specific spending plans for individual government departments beyond 2024/25 were not set out by the previous government—so some individual departments could see real-terms spending increases above 1% while others could see lower increases, or even reductions, depending on what the government chooses to do. 

The IFS wrote in May that the commitment to maintaining a 1% annual real terms increase in overall public spending implied spending reductions to ‘unprotected’ department budgets of between £10 and £20 billion by 2028/29.

It has since estimated that maintaining the 1% growth rate would require departmental spending to increase by £14 billion by 2028/29 alongside reductions in unprotected budgets, while avoiding real-terms reductions to unprotected budgets would require a total spending increase of £30 billion by the same date. 

Meanwhile, in order to deliver its manifesto commitments, fund additional public sector pay pressures, and avoid real-terms reductions to unprotected day-to-day spending and overall capital spending, it estimates Labour would need to increase spending by £40 billion by 2028/29. It’s not clear if the £40 billion figure cited in media reports refers to this figure.

And because Labour’s own fiscal rules as set out in its manifesto state that day-to-day spending must be met by revenues (that is, it cannot be funded by borrowing increases, as would be an alternative option), any increase in spending must be covered by a combination of tax increases or spending reductions elsewhere.

So again, this figure is not a “black hole” in the same sense as the term was used to describe the £22 billion shortfall—it appears to instead refer to the amount the government will need to find in combined increased tax revenue and spending reductions in order to increase overall public spending in real-terms in the coming years, while complying with it’s own rule to balance the budget without increasing borrowing.

Ms Reeves is reportedly set to change how the government measures its performance against its target of ensuring debt is falling by the fifth year of economic forecasts. This is reportedly in order to increase the amount the government can borrow to invest—but as explained above, the extra amount available to borrow won’t be used to fund day-to-day spending.