The Government's £22bn Deficit

4 September 2024, 11:47 BST

Ahead of her speech at the Labour Party conference, Chancellor Rachel Reeves has once again attributed a £22bn deficit in public finances to the previous Conservative government. Ministers have frequently used this figure to justify difficult decisions, including the removal of the winter fuel payment, and Prime Minister Sir Keir Starmer has also hinted at a tough Budget in October.

However, economists argue that the financial shortfall should not have been entirely unexpected by Labour. They suggest that many of the pressures now emerging could have been foreseen.

Origins of the £22bn Claim

The £21.9bn figure comes from a Treasury audit published in July, shortly after Labour took power. The report highlighted overspending in several key areas, including public sector pay rises, unforeseen inflation costs, and support for Ukraine. Although this amount represents only a small portion of the expected total public spending of £1,226bn for the year, experts suggest that it is still a significant figure.

Gemma Tetlow from the Institute for Government noted that £22bn would be a large overspend compared to previous years. To address some of the shortfall, Rachel Reeves announced measures such as ending winter fuel payments for those not receiving pension credit and cancelling infrastructure projects like the Stonehenge road tunnel.

Could the Overspend Have Been Anticipated?

While some spending, such as the £6.4bn cost of supporting the asylum system, was unexpected, other pressures were more predictable. Pay review bodies had recommended larger-than-expected pay rises for public sector workers, which Labour would have been aware of before coming into power.

Paul Johnson from the Institute for Fiscal Studies stated that while some financial details were hidden from view, the overall outlook was largely unchanged from what was known before the election.

Conservative Response

Former Chancellor Jeremy Hunt dismissed the £22bn figure as "spurious," accusing Rachel Reeves of laying the groundwork for future tax increases. He also criticised the claim of a financial "black hole," suggesting that Labour was exaggerating the situation to justify tough Budget decisions.

Meanwhile, a leaked letter from civil servant Simon Case suggested that the previous government's failure to conduct a spending review contributed to uncertainty about the public finances. However, Hunt refuted the idea that officials would have knowingly misrepresented financial estimates.

Is There Really a ‘Black Hole’?

The term "black hole" implies that the government’s options were severely limited, but in reality, the Labour government made specific policy choices. While they opted to restrict the winter fuel payment to pension credit recipients, they could have chosen alternative strategies.

Lucy Powell, Leader of the House of Commons, argued that without these tough choices, the UK could have faced a financial crisis similar to that triggered by Liz Truss's mini-budget. However, there is little evidence to suggest an immediate risk of a run on the pound. Nina Skero, CEO of the Centre for Economics and Business Research, stated that concerns about the UK's financial stability are "highly speculative" and not supported by current investor sentiment.