As we move apace towards the new Labour Government’s first Budget, renewed scrutiny has fallen on the so-called ‘black hole’ that the Chancellor claimed had been uncovered in July’s Public Spending Audit (PSA).

Rachel Reeves outlined £22 billion worth of in-year net spending pressures, which were itemised to some extent in the accompanying document. This included £11.6 billion in pay awards, £6.4 billion to deal with the asylum and migration systems, £1.7 billion for Ukraine, £2.9 billion for rail services, and a few other small lines – set off against the reserve set aside in the Spring Budget of £9.2 billion, and some expectation of departments being able to absorb some of these pressures.

But one of the more mysterious lines was the top one in table 1, which claimed there were £8.6 billion of ‘normal reserve claims’ on RDEL. This made some commentators and the Official Opposition suspicious about what those entailed, especially with it being so early in the financial year. It would appear very possible that either the previous Chancellor had significantly underbudgeted in a number of significant items, or that some of these claims might be inflated for ‘presentational’ purposes – maybe taking a dimmer view of the prospects of some of these materialising.

Treasury transparency: sadly not forthcoming

One of our main asks of public institutions is to be transparent, and so it was disappointing when the FT reported that the Treasury refused to disclose details of what these normal claims might be. Seems like a new dawn has yet to set on 1 Horse Guards Road in that regard.

In the absence of disclosure from the centre of the UK Government, we can trawl prior years’ claims on the reserve to ascertain to what extent the £8.6 billion claim is credible. After all, the notes to the PSA table reaffirmed that they “meet Consolidated Budgeting Guidance parameters as unforeseen, unavoidable and unaffordable; as well as technical adjustments (e.g. classification changes).”

Technical adjustments might well be a significant part of the story, because the Treasury’s insistence on conducting a Spending Review in 2021 and not updating totals to incorporate changes to the classification of leases has caused problems. These not cash items and therefore while they might increase measured borrowing, they do not require additional cash for the government to operate. So they should really be neither here nor there for the purposes of in-year spending pressures, which are a cash management exercise.

But if we are to believe these are genuine spending pressures, it must surely be that these £8.6 billion aren’t simply charges for additional depreciation and leases. Otherwise this would be no more than a cynical use of arcane Treasury concepts for political purposes.

So how has the reserve been managed in recent years, and what kind of thing might these ‘normal claims’ be? We have gone through many hundreds of pages of supplementary estimates so no one else has to – and nor should they, because it’s not pleasant work.

Genuine one-off pressures have been decreasing over the past few years

We have looked at the SR21 period, at which point any pressures known about should have been budgeted for, in accordance with good public finances management. It’s often difficult to know for sure whether claims genuinely meet that definition, but clearly if they are repeated year-on-year for the same purposes or if they are things like pay awards, they cannot in good conscience be classified as one-offs, but rather business as usual.

Genuine RDEL one-offs appear to be getting smaller year-on-year, falling from £18.5 billion in 2021-22 (large due to the pandemic) to £5.6 billion in 2022-23 and £4.4 billion in 2023-24. 2022-23 still included over £5 billion of claims by the Department for Health and Social Care related to the pandemic, whereas the largest items in 2023-24 are due to the Department for Transport writing off HS2-related assets and covering nearly £1 billion of rail revenue shortfall to train operating companies.

Given this, it seems implausible that in just six months twice as much would have crystallised in terms of one-off, unforeseen spending as in the whole of 2023-24. And so we must conclude that the problem must lie within areas for which money set aside for contingencies is being used to finance very-much-foreseen spending.

A dismal picture of budgeting emerges

Sadly the Treasury’s high-minded words about what normal claims on the reserve are collide desperately with reality when looking at what’s been happening in the last three years.

To be fair, no one is suggesting that the letter of the Consolidated Budgeting Guidance hasn’t been complied with. Paragraph 2.40 says that “[u]nless otherwise agreed with the Chief Secretary, the Reserve cannot be used for [s]pending that is recurrent, or could lead to increased spending in future years which is not affordable in department’s budgets”, and we’ve no doubt that Chief Secretary approval was given. But doing so repeatedly clearly goes against the spirit of the guidance.

There are three particularly egregious examples in the last three years. Ukraine aid programmes, both civilian (Ministry of Housing, Communities and Local Government) and military (Ministry of Defence), have continued to be funded from the reserve since 2022, and there has been plenty of opportunity to adjust control totals for it.

The DHSC pay award for 2023-24 was funded through the reserve as well, running roughshod over the principle of not using the reserve for recurring costs.

And the Home Office has been the worst culprit of all, essentially running the costs of the asylum and migration systems through the reserve instead of its DEL settlement. Recurring or business-as-usual spending funded from the reserve by the Home Office rose from £1 billion in 2021-22 to £3.2 billion in 2022-23 and an astonishing £5.6 billion in 2023-24. Given this path, the £6.4 billion highlighted by Rachel Reeves in the PSA seems all too believable.

But all these recurrent spending items are also itemised – so what’s the rest?

Ukraine aid, asylum and migration and health pay awards are all clearly pressures that have been fulfilled by the reserve in 2023-24, and so they clearly amount to pressures over and above the control totals.

But they are also separate lines in table 1 of the PSA, and so they cannot explain what the £8.6 billion refers to. So even if we assume that the 2023-24 one-off pressures are the same (excluding HS2, which obviously cannot be repeated) and if we exclude the itemised lines in the PSA table (which include support for rail passenger services, and so we can exclude that from the one-off elements as well), a reasonable estimate for the amounts that would be required for ‘normal claims’ would be in the region of £3.5 billion, leaving over £5 billion of spending pressures that are difficult to understand.

What could they be? Once you exclude DHSC, Home Office, DfT and MoD, there aren’t that many big spending departments, and so it is hard to fathom how the £8.6 billion number was arrived at.

Of course, the Treasury could eliminate the need for all this detective work by publishing the list instead of hiding behind ‘quality assurance’ and supposed ‘chilling effects’ of putting it in the public domain. Here’s hoping they do.

The OBR’s long-term assessment of the public finances is pretty damning

This week also saw the Office for Budget Responsibility release its annual Fiscal Risks and Sustainability report, which contains scenarios on a number of risks, including climate change mitigation costs and population health, as well as an update to its long-term projections.

The headline is sobering in terms of the risks to the public finances. On current policy, the UK’s national debt is projected to grow from just under 100% of GDP today to 275% of GDP in 50 years’ time. This is in large part driven – as has been the case in every one of these reports – by the ageing of the population, which increases health care and pension costs, with a particularly explosive path from the 2040s onwards.

One of the most interesting scenarios however is the one looking at higher productivity, taken to mean 2.5% growth a year, which was the UK’s average in the 1990s. That would be enough to keep public sector net debt at manageable levels over the whole horizon of the projections, but only if government spending didn’t grow quite as fast – otherwise, debt would still end up on an explosive path.

There is a lot more on this report, and we might well come back to it in the coming weeks and months – especially regarding labour market scenarios.

The winter fuel payment row continues – this time regarding impact assessments

The Prime Minister’s spokesperson has now confirmed that no impact assessment of the means-testing of the winter fuel payment has been carried out. It’s not a great look for a number of reasons, one being that it is fit and proper to do so when announcing major policy changes. Impact assessments include impacts on equalities, and are an important driver of the considerations that a Government must make when considering the effects of policies.

This is all the more awkward when the Labour Party’s manifesto committed to the implementation of the socio-economic duty from the Equality Act 2010. And while it is not technically mandatory to include it in any assessment at the moment at UK Government level, it’s not great to eschew in one of the first main policy decisions announced – or to not do an assessment in advance to begin with.

We’ll be watching to see whether change comes in this direction, but the Prime Minister will forgive us if on these first signs, we opt not to hold our breath.