Is there a £22 billion “black hole” in UK public finances?

Speaking before the Labor conference, Chancellor Rachel Reeves once again accused the Tories of leaving a “£22bn black hole” in the public finances.

Government ministers have repeatedly used the figure to justify decisions to cut winter fuel bills, while Prime Minister Sir Keir Starmer has warned that October’s budget will be “painful”.

But economists say the state of public finances should not come as a complete surprise to the Labor government, arguing that some of the stress should have been expected.

£21.9bn figure under audit The Ministry of Finance announced at the end of July – just weeks after Labor came to power.

The paper looks at areas of public spending that will exceed budget this year, including:

• Public sector salary increase
• Cost overruns on some projects, such as supporting the asylum system
• Unforeseen costs, such as higher-than-expected inflation
• Military aid to Ukraine

To put this diagram into context, In the spring budget Public spending is expected to total £1,226 billion this year. £22bn is just a small part of that.

But Gemma Tetlow of the Institute for Government think tank told BBC More or Less: “If you look at history and the government’s overspending in previous years, £22 billion is going to be a pretty big number.”

To make up for some of the shortfall, Chancellor Rachel Reeves Many announcements were made:

• Stop paying winter fuel bills for those not receiving pension credit
• Canceling infrastructure projects such as the road tunnel near Stonehenge
• Repeal previous government measures such as plans to cap social care costs from October 2025.

Indeed, some aspects of the spending are surprising.

Ms Reeves is right to say, for example, that the estimated £6.4bn cost of supporting the asylum system is almost entirely unfunded, according to the Institute for Fiscal Studies (IFS), an independent think tank.

On July 29, the government’s own public finance watchdog – the Office for Budget Responsibility – wrote that the extent of the overspending had not yet been realized. An investigation is currently underway and will be reported before the Budget in October.

While Labor can credibly claim that it does not know all areas of overspending, certain things are known.

For example, the pay review body may recommend a pay rise higher than the 2% originally budgeted by the previous government to retain teachers, nursing staff and other public sector workers.

IFS director Paul Johnson offered this view: “The numbers were probably a little worse than they thought at the time and I think some things are being hidden, but the overall picture over the next four or five years is this.

Jeremy Hunt, the previous Conservative chancellor, said the £22bn shortfall was “bogus” and that the public finances were not as bad as Ms Reeves was trying to portray. He accused her of “shamelessly trying to lay the groundwork for tax hikes.”

However, in a leaked letter, the UK’s most senior civil servant, Simon Case, said the previous government’s failure to conduct a spending review in the final years of its term had led to uncertainty in public finances.

Reply to letter on XHunt said it would be a breach of the Civil Service Act if officials deliberately signed off on incorrect public finance estimates, regardless of whether the previous government decided to hold a spending review – and if that was not the case, “then Labour’s view of the £22bn ‘black hole’ The statement was exposed as false.”

The problem with terms like “black hole” is that they suggest that government intervention is forced. Ms Reeves told the House of Commons: “The scale of the situation we are dealing with means extremely difficult choices.”

It’s important to remember that choices do get made. The government decided to only pay winter fuel payments to those receiving pension credit, but it could have made other decisions.

For example, its decisions were based on the need to meet the financial rules it imposed on itself, but it could have changed those rules. Or it might decide to spend less on other things.

Lucy Powell, leader of the House of Commons, told BBC News on September 1: “If we don’t take this action, we will see a run on the pound and we will see the economy collapse.”

It’s always difficult to predict when markets will lose confidence in a government, as happened after former Prime Minister Liz Truss’s mini-Budget, but there are few signs that this will happen if the government doesn’t act immediately , this will happen.

Nina Skero, chief executive of the Center for Economics and Business Research, told BBC Verify: “It is difficult to find any evidence to support the idea that there is an imminent risk of a run on the pound.”

She added that the size of any hole in public finances “is highly speculative and depends on forecasts, and investors looking at the UK are not sounding alarm bells yet”.