The black hole and the bombshell

Not the gap between spending and borrowing that we already know about, not the wasted billions on PPE and HS2. Just the shortfall between what the last government said it was planning to do this year and the money necessary to do that.

The language Reeves used was extraordinary. She had been handed, she said, “the worst economic inheritance since the second world war”. She continued: “Upon my arrival at the Treasury three weeks ago it became clear there were things I didn’t know. Things that the party opposite covered up. From the opposition, from this House, from the country.”

This was far beyond negligence, Reeves suggested. “They had exhausted the reserve, and they knew that – but nobody else did.” She said the previous government had claimed everything was laid out in the open, and responded: “How dare they.”

Some of the claims made by the chancellor were staggering. That the military and other aid that we are giving to Ukraine in its life-and-death struggle with Russia has not been funded. That the increasing costs of the failed asylum system have not been covered.

That a rail system no-one loves is soaking up huge amounts of cash. That Boris Johnson’s hospital building schedule is unachievable. That public sector pay awards have been ignored and underfunded. Although Reeves is being very generous in funding them this year.

Her argument is that we can no longer afford to effectively cut the wages of teachers, doctors and nurses and expect them to work in this country when they can go abroad and earn more, having been trained to a high standard at great expense to the British state.

Jeremy Hunt, the shadow chancellor, was furious about being blamed for this black hole. He especially hated the accusation that the Office for Budget Responsibility had been kept in the dark about the full depth of the country’s financial problems.

But his indignation did not survive the afternoon, because the OBR then slapped the former chancellor down, in an amazing and humiliating intervention. It wrote to the Treasury Select Committee in apparent support of Rachel Reeves’s claims.

The OBR says that it was unaware of 2024-25 spending pressures until this week, so obviously not when it made its assessment in March and signed off Jeremy Hunt’s budget. It has also pointed out that the books suggest this will be one of biggest in-year overspends on record.

And in an amazing step, it has launched a review of the “adequacy” of what Hunt’s Treasury told it before the March Budget. It now seems to suggest it may have been lied to.

If any of this is true, the most serious consequences should follow, including heads rolling among the senior Treasury civil servants who allowed it to happen.

The Tories already hate the OBR with a passion, they will be livid now. It
shot Jeremy Hunt’s horse and called into question the quality and honesty of what he and the last government was telling it, and us, when it checked their books.

The reputation of the last government’s honesty and its financial claims now lie in tatters. Admittedly, they did so before – but this is even worse.

Happy though that will make Rachel Reeves, she has bigger fish to fry. She is obviously not doing all this to court political popularity.

She has cancelled road projects on the A303 and A27, immediately. She has cancelled the investment opportunity fund, and Boris Johnson’s pet scheme to reverse the Beeching cuts to the rail network.

But above all, she has abolished the Winter Fuel Allowance for all pensioners. Only those on Pension Credit will still get the payment.

Some may think this is a very hard-hearted cut, that Reeves is punishing pensioners and leaving them in the cold next winter. The truth is that the Winter Fuel Allowance was originally a one-off payment that became an expensive millstone around successive governments’ necks; no minister or government could ever stop paying it.

As a result, it went to a large number of pensioners who had no need of it at all and cost a small fortune. It has continued to be paid to these better-off pensioners even when they are also benefiting from larger than expected increases thanks to the triple lock.

The government will save some £1.5 billion a year with this policy alone. But it is more than just a saving, this is a message. If the chancellor is willing to annoy millions of pensioners in the first statement on the government’s finances, it is a sign that she is ready to make even tougher decisions in the months ahead.

Remember Rachel Reeves has not even mentioned the state of council finances, the utterly broken prison system, the underfunded armed forces, the scandal of NHS spending and all the rest. There is much more of this to come.

If Reeves really had been cynically exploiting the state of the finance shortfall rather than genuinely worried about it, there would be far easier ways of balancing the books than taking the winter fuel allowance off pensioners. Ones that wouldn’t risk hurting the government or Reeves personally so much.

This suggests that Reeves is very serious and very worried – and watching the Tories suffer as the OBR suggests they may have misled us all will be scant consolation. What she is saying is that while the Conservatives may have been conning the country, the state’s finances are in a perilous state – and that things are going to get worse before they get better.