We have inherited a projected overspend of £22 billion. That is a £22 billion hole in the public finances now—not in the future, but now.
She will fool absolutely no one with a shameless attempt to lay the grounds for tax rises that she did not have the courage to tell us about.
In a widely-trailed statement in the House of Commons on Monday 29 July, the Chancellor of the Exchequer Rachel Reeves MP said that her government had “inherited a projected overspend of £22 billion”.
This has prompted claims and counter-claims from Labour and the Conservatives, and between the chancellor and her Conservative shadow Jeremy Hunt, with each suggesting their opposite numbers have been dishonest about the current state of the public finances.
And this follows comments before the election from the Institute for Fiscal Studies (IFS) that referred to a “conspiracy of silence” from both parties in relation to the difficult choices that would need to be made by whichever party formed the new government.
On Monday, Ms Reeves said some of the reasons for the “£22 billion hole in the public finances now” were overspends on the asylum system and the transport budget, as well as the impact of inflation on departmental budgets generally, as outlined by the Treasury.
The shadow chancellor, Jeremy Hunt MP, said Ms Reeves’s statement was a “shameless attempt to lay the grounds for tax rises”, and challenged her claims that she didn’t know the full scale of spending before taking office.
The IFS has suggested there is some truth in both these positions. It said that while many of the challenges were “entirely predictable”, some of the financial pressures facing the new government do “genuinely appear to be greater than could be discerned from the outside”.
Here we take a closer look at what’s been said.
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What did Ms Reeves say?
Ms Reeves said that on her “arrival at the Treasury three weeks ago, it became clear that there were things I did not know […] There were things that the Conservative party covered up”.
On Monday, the Treasury published a Public Spending Audit, which Ms Reeves referenced during her speech. It found that the “forecast overspend on departmental spending is expected to be £21.9 billion” above the totals set during the Spring Budget.
The document points to several “unfunded policy decisions” made since the Spending Review 2021 which “have increased pressures on public spending in 2024-25 by a total of £2.6 billion”, including additional funding for buses and the extended £2 fare cap, and the extension of the Household Support Fund, as well as military support to Ukraine, spending on asylum support, and pressures on rail services following a drop in demand post-pandemic.
Ms Reeves also said that the government will “meet the recommendations of the pay review bodies” for public sector workers in areas such as the civil service, education, the armed forces and health, at a cost of £9 billion this year—increases of 5% to 6%. The government has also offered a pay deal to junior doctors in England, at an average of 22.3%.
According to the Public Spending Audit, public spending on pay “is expected to be around £11-£12 billion higher across central government departments in 2024-25”, even before the newly announced pay rises are taken into account.
Ms Reeves said there would be £5.5 billion worth of cuts this year, and over £8 billion next year.
These include means-testing the winter fuel payment, cancelling the introduction of the advanced British standard qualification in England (intended to replace A-levels and T-levels), stopping the Rwanda scheme for asylum seekers and scrapping a cap on how much people pay for social care.
What was said before polling day?
During the election campaign, in an interview with the Financial Times, Ms Reeves said she would not enter the Treasury and be able to claim things were worse than expected. Ms Reeves said: “We’ve got the OBR [Office for Budget Responsibility] now [...] We know things are in a pretty bad state [...] You don’t need to win an election to find that out”.
Just a few days after this interview, the independent think tank the Institute for Fiscal Studies (IFS) said that a new government would likely see many public services “facing cuts of somewhere between £10 and £20 billion a year” by 2028/29 due to “plausible settlements for the NHS, childcare and defence”.
As early as March, after the Spring Budget, the IFS said that “Government and Opposition are joining in a conspiracy of silence in not acknowledging the scale of the choices and trade-offs that will face us after the election”.
In January, chair of the OBR, Richard Hughes, told a House of Lords committee that the independent government economic watchdog relies “on what the Government tell us are their desired paths for spending on public services” and said that the then government provided “almost no detail” about how it would deliver falls in public spending as a share of GDP. He said “the government have not even bothered to write down their departmental spending plans underpinning their plans for public services”.
What has been the reaction to Ms Reeves’s speech?
Following the chancellor’s statement, Mr Hughes wrote to the Treasury Committee Clerk and said that the OBR has launched a review into the preparation of the Departmental Expenditure Limits forecast for the March 2024 Economic and Fiscal Outlook, the report they produced for the Spring Budget. He said the review “will assess the adequacy of the information and assurances provided to the OBR by the Treasury regarding departmental spending”, and that the review will be finished ahead of the Budget on 30 October.
Director of the IFS, Paul Johnson, said that while “it was always clear and obvious that the spending plans [Ms Reeves] inherited were incompatible with Labour’s ambitions for public services […] the extent of the in-year funding pressures does genuinely appear to be greater than could be discerned from the outside”.
However, he said “not all of what we heard should have come as a terrible surprise”.
Writing in The Times, Mr Johnson said that a lack of any Spending Reviews since 2021, combined with higher than expected levels of inflation, policy changes and the cuts in National Insurance, contributed to what he calls the “fiscal mess” Labour’s government has inherited.
Mr Johnson said that “a big part of what we were presented with on Monday was entirely predictable”. He said that Ms Reeves was “to some extent” right to be surprised by what she found, and that “the degree to which some spending programmes were not properly funded was not fully transparent”. But that doesn’t “change the fact that we always knew that here are some really tough decisions coming up on tax, spending and borrowing”.
Shadow chancellor Jeremy Hunt responded to Ms Reeves in the Commons saying that since January, Ms Reeves had “privileged access to the Treasury permanent secretary” and that “she could have found out absolutely anything she needed”. He said Ms Reeves’s statement “is not economic—it is political”.
Mr Hunt wrote to the Cabinet Secretary, Simon Case, following Ms Reeves’s speech, expressing concern that her claims “directly contradict the documents and legislation the new government has put before Parliament”, referring to the Treasury’s Main Estimates for 2024/25, that were published on 17 July.