£22 billion fiscal hole leaves Conservatives with serious questions to answer

The Treasury audit is a mix of the genuinely shocking and the very predictable, with real-world consequences.

Ten million people in the UK are set to lose their Winter Fuel Payments. A universal benefit introduced by another Labour chancellor in 1997 is set to become means-tested.

The decision will save the new Labour government £1.4 billion this winter.

In total, Rachel Reeves has identified £5.5 billions of savings for 2024/25. And beyond that - unfunded projects are being ditched.

The plan for the Stonehenge tunnel has been scrapped, along with a bypass on the A27 and the Restore Your Railways scheme which was supposed to improve transport links and lift economic growth.

Reform to limit the amount of money people have to spend on social care in later life to £86,000 is also being abandoned.

The policy was postponed until 2025 by the Conservatives. The Treasury audit, commissioned by the new chancellor, has decided a lack of funding makes it “impossible to deliver”.

Reeves says these are “incredibly tough” but unavoidable choices.

She says the audit shows the government is over-spending to the tune of £22 billion this year, in a way no one had realised and the previous government tried to conceal.

And the Conservatives do have serious questions to answer.

Why hasn’t enough money been set aside to house asylum seekers and process them claims, to subsidise the railways and to provide the military and civilian support that was promised to Ukraine?

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The “hole” is real and the Office for Budget Responsibility only found out about the extent of the problems last week.

It has launched a review into what it calls “one of the largest year-ahead overspends” outside of the pandemic years.

The review will “assess the adequacy of the information and assurances” provided ahead of Jeremey Hunt’s Budget in March.

But not everything can be pinned on the Conservatives. The idea that Labour would struggle to keep to the spending plans they inherited is not remotely new.

And it is the new Labour government that chose to increase public sector pay by £9.4 billion a year more than was budgeted for.

Difficult decisions have been taken, more lie ahead.

After the savings announced today, there remains a funding shortfall of £16.4 billion for this year and many of these costs, like public sector pay, are recurrent.

That’s still quite the “hole”. And, note: this hole is entirely separate to the hole in the public finances of getting on for £40 billion a year that the Institute for Fiscal Studies (IFS) identified back in March and highlighted repeatedly during the election campaign.

The implied spending squeeze on local government services, courts, prisons and public investment in this parliament has yet to be addressed.

The situation is worse than the IFS realised.

Reeves has confirmed that she will hold an autumn Budget on October 30th in which further tough choices will need to be made.

A multi-year spending review, in which money will be allocated to government departments, will take place at the same time.

The chancellor’s room for manoeuvre against the manifesto promise she made to get debt falling has vanished.

Unless the economy suddenly discovers a sixth gear, expect to hear about further tax rises or spending cuts or a combination of both.

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