The UK government has revealed a £22bn “black hole” in the country’s finances. The money was inherited by the current government from the Conservative party and has been used to justify the cut to the winter fuel payment by the government. The Labour party has warned of a “painful” October Budget due to the state of the public finances. Economists have argued that some of the pressures on the finances should have been anticipated.
The £21.9bn figure was published by the Treasury at the end of July in an external audit. The audit highlighted areas of public spending that were set to go over budget. These areas include military assistance to Ukraine, overspending on certain projects and public sector pay rises. To combat this shortfall, Chancellor Rachel Reeves cancelled infrastructure projects, ending winter fuel payments for those not receiving pension credit, and scrapped previous government measures.
The Institute for Fiscal Studies (IFS) states that nearly all the estimated £6.4bn cost of supporting the asylum system was unfunded. The Labour government has argued that there was no prior knowledge of the overspending, but the IFS has pointed out that certain factors were known to the government. For example, the last government initially budgeted a pay raise of 2%, but pay review bodies were likely to recommend a rise greater than this to retain public sector workers.
The previous Conservative Chancellor, Jeremy Hunt, called the £22bn gap “spurious”, stating that the public finances were not as bad as suggested by Rachel Reeves. It has also been suggested that the previous government’s failure to hold a spending review in its final years in office contributed to uncertainty over the public finances.
While the situation may be tough, it is important to remember that the government made certain choices. For instance, the government decided to give winter fuel payment only to those receiving pension credit, but they could have taken other decisions. The government could have changed the fiscal rules or spent less on something else. Nevertheless, there is no evidence at present of a run on the pound or any imminent risk to UK investors
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