As parliament goes into recess, Rachel Reeves and Jeremy Hunt are slinging accusations at each other about the state of the public finances.
The allegations all come down to an investigation into the public finances published by the Treasury this week. It was not pretty.
Labour hopes it will put the final nail in the coffin of Conservative economic credibility. The Conservatives, for their part, are frantically fighting to pin the blame back onto Labour.
What is the review?
On Monday Rachel Reeves claimed that the Conservatives had left a £22bn fiscal hole in the public finances that needed to be plugged.
The figure, which reflects in-year funding pressures, was the finding of an internal audit on the state of the public finances commissioned by the Chancellor upon entering office.
Reeves had already admitted that the fiscal inheritance would be challenging, but she is likely to use the audit as a justification for tax rises later in the year.
“Upon my arrival at the Treasury three weeks ago, it became clear that there were things I did not know,” she told the House of Commons on Monday.
Jeremy Hunt, the shadow Chancellor, has rubbished the report, claiming it was “nonsense” and was merely a pretext for Labour to raise taxes. So what’s going on?
What’s behind the £22bn hole?
The £22bn figures reflects the projected overspend on departmental budgets this year, but not all of it can be attributed to the previous government.
“In reality the largest single item of ‘spending pressure’ in the current fiscal year was actually pay awards for public sector workers that the Chancellor had agreed to since taking office earlier this month,” analysts at RBC said.
Pay rises for the public sector, which came in at between five and six per cent, cost the Chancellor £9.4bn, Departments were only given funding for a 2 per cent rise at the last spending review in 2021.
The second largest portion of the fiscal gap comes from ‘normal reserve’ claims, but there are some question marks around this.
Reserve claims are essentially rainy day funds set aside for unforeseen events. The Treasury says £8.6bn has been spent on normal reserve claims in just three months, but it has not given a breakdown of this spending.
Ben Zaranko, an economist at the Institute for Fiscal Studies (IFS), said on X that the Treasury’s document “leaves us none the wiser”.
Asylum spending was the third largest contributor at £6.4bn. This resulted from the costs from the Conservative decision to stop processing asylum claimants while doing nothing to budget for the resulting costs.
Rachel Reeves claimed that the last government “covered up the true extent of the crisis and its spending implications.” But Labour did already know about some of the funding pressures.
Back in February Labour pointed to the “eye-watering overspend on asylum support”. James Smith, research director at the Resolution Foundation think-tank, told the Financial Times that Labour “knew there was overspend in the Home Office budget”, although he noted there was some “genuinely new information”.
A spokesperson for the Home Secretary told the paper: “We were literally staggered by the figure for this year and the forecast for further years”.
The remaining funding pressures come across a range of different policy areas, with £2.9bn needed to support the railways, £1.7bn in support for Ukraine and £1.5bn for pressures in the health services.
Read more
Experts react to Reeves: The finances might be worse than expected – but tax hikes are still coming
So, who is to blame?
The debate over how much of the fiscal inheritance is a surprise obscures the bigger picture, which is that the last government was reckless.
The Conservatives cut taxes twice in the run-up to the election when it was not affordable to do so.
Funding those tax cuts required the Conservatives to essentially ignore some of the funding pressures documented in Reeves’ audit and pencil in unrealistic spending commitments for after the election.
“If the scale of these overspends and spending pressures was apparent in the spring… then it is hard to understand why they weren’t made clear or dealt with in the Spring Budget,” Paul Johnson, director of the IFS said
“Jeremy Hunt’s £10bn cut to national insurance looks ever less defensible,” Johnson added.
Of course, the Tories knew that they would not be around to pick up the pieces. But Labour signed up to those tax cuts when they could have chosen not to.
Turning to the fiscal hole, there’s no doubt that its not all down to the Tories – just look at the public sector pay rises. There’s also no doubt that not all of it was a complete surprise to the new government.
Its also true there were some genuinely new pieces of information which will make the government’s already impossible job marginally harder. But its marginal.
The scale of the fiscal challenges were readily apparent to anyone who wanted to look. Labour chose to conveniently ignore that during the election while the Conservatives were simply in dreamland.
In the grand scheme of things, the spending audit largely represents a politically convenient way for Labour to face those facts. Now the question is what they’ll do about it.