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 dominated debate over the public finances in the run-up to Labour’s first Budget in October.
We’ve seen this figure used time and again by senior ministers, whether at Prime Minister’s Questions, during Labour party conference, in the chancellor’s Budget speech or elsewhere. In fact, our AI tools have picked up almost 600 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, 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.
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.
We first published this explainer on 24 October 2024, and have since updated it following the Autumn Budget to include details of the Office for Budget Responsibility (OBR) review which was released the same day.
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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 £13.4 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 reduced the forecast overspend from £21.9 billion to £16.4 billion.
These measures were included in the Autumn Budget, which set out a total of £41 billion worth of tax increases by 2029/30.
The Conservative party has pushed back on the £22 billion figure, with then-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 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).
The OBR published its review of its March 2024 forecast on the same day as the Budget. It’s important to note that the review did not set out to confirm or refute Labour’s £22 billion ‘black hole’ claim, but rather to “assess the adequacy of the information and assurances provided to the OBR by the Treasury regarding departmental spending” ahead of the March 2024 Budget.
The review found that an estimated £9.5 billion of additional spending pressures were known to the Treasury but were not made known to the OBR at the time it was preparing its March forecast.
The OBR concluded: “Had this information been made available, a materially different judgement about RDEL spending in 2024-25 would have been reached. The underspend assumption of £2.9 billion would very likely have been dropped, and so there would have been a materially higher DEL forecast for 2024-25.”
The review stated that it was not possible to know how much higher this forecast would have been.
It notes that “without rewriting history on the basis of greater pre-forecast information and challenge, it is not possible to judge how much of the £9.5 billion additional pressures identified from the information provided by the Treasury for this review, as existing at the time of the challenge panel in February, would have been absorbed and offset by other savings”.
The OBR review has been cited by both Labour and the Conservatives in debate over the £22 billion ‘black hole’ claim.Ms Reeves quoted it at the start of her Budget speech, noting that it said that had the OBR known about the undisclosed spending pressures, its Spring Budget forecast for spending would have been “materially different”.
The Conservatives meanwhile have argued that the review casts doubt on the £22 billion ‘black hole’ claim. In particular, various Conservative politicians have cited OBR chair Richard Hughes’ comment that “nothing in our review was a legitimisation of that £22 billion [figure]”, as evidence that Labour’s claim is false.
It is true that the OBR review does not confirm Labour’s £22 billion figure, but the £9.5 billion figure referenced in the review does not necessarily prove that the £22 billion figure published by the Treasury under Labour is incorrect either, and the OBR did not say that the government “made up” this figure, as has been claimed.
This is because Labour’s figure includes pressures which were identified after OBR prepared its forecast and so were beyond the scope of the OBR’s review. (This includes pressures that emerged while the Conservatives were still in government and some which were linked to decisions taken under Labour—for example, its decision to accept 2024/25 pay award recommendations in July).
In its response to the OBR review, the government said that the total additional pressures facing government departments increased from the £9.5 billion identified ahead of the March 2024 forecast to £16.3 billion at the time of the Spring Budget, before further increasing to £21.9 billion “by the time of the General Election”.
Correction 29 October 2024
This article incorrectly stated that £13.9 billion of the additional pressures identified were offset by reserve funds and other allowances. The correct figure is £13.4 billion.
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