Labour ministers have been told they will be blocked from using the government’s reserve funds to pay public sector staff and will only be given cash in exceptional circumstances.
James Murray, the chief secretary to the Treasury, has told colleagues across the Cabinet that access to rainy day funds will be limited as the government hopes to take a more fiscally prudent approach to public finances.
Murray said departments must take “responsibility for managing pressures and making choices about priorities without relying on the reserve”.
“We must deliver the efficiency plans set out in June – reducing administrative budgets, including those of arm’s-length bodies and agencies – and deliver comprehensive digital transformation,” he also wrote.
Fresh demands within the government reflect the Treasury’s worries about borrowing levels, with the current budget deficit this year cumulatively around £13bn higher than the Office for Budget Responsibility (OBR) last forecast.
Greater restraint may also help the government intervene on crises unfolding across industry and security threats.
Labour told to rein in spending
According to the Spending Review, cash reserves are set at £4.5bn this year, rising slightly higher in the next three years to £6.7bn.
The enforced rules will likely put pressure on the Department for Environment, Food & Rural Affairs (DEFRA) and the Foreign Office given budgets for both departments have been cut.
The Home Office, which has used the reserve funds to pay for asylum hotels, will also be under pressure to rein in expenditure given it also faces departmental cuts in the three-year Spending Review period.
Cuts to administrative costs by 15 per cent across Whitehall will also be relied on for Reeves to meet her fiscal rules.
The letter also signals that the government may yet push for spending cuts at the Budget to lessen the blow of higher taxes made to meet fiscal targets.
Shortly after arriving in Downing Street, Chancellor Rachel Reeves accused her predecessors of overusing reserve funds by three times, which she claimed had left a bigger fiscal hole than anticipated.
Despite calls for some greater control over spending, Reeves still faces having to raise as much as £30bn next month to restore her headroom.
Economists are split on whether she will build a bigger headroom than £9.9bn, with JP Morgan suggesting she may leave herself with a smaller buffer to avoid breaking manifesto commitments.
Oxford Economics and the National Institute of Economic and Social Research (NIESR) have called on the Chancellor to build a bigger headroom to rebuild credibility and prevent further tax shocks hitting households and businesses in future years.