WIREDGOV

"Frankly, nobody comes out of this smelling of roses". Paul Johnson writes for the Times.

Yes, the Tories left Labour a mess to clear up but it’s disingenuous for Rachel Reeves to claim that taxes might have to rise to fund predictable public sector pay rises

A week on from Rachel Reeves’s big reveal that there is a £22 billion “black hole” in the nation’s finances, what are we to make of the claims and counterclaims and, more importantly, what can we learn?

Frankly, nobody comes out of this smelling of roses. Not the Conservatives who really did leave a lot for the new government to clear up, and were not honest about the challenges ahead. Not Labour, which knew the broad outline of these challenges, but refused to confront them in its manifesto and pre-election statements. And not our institutional framework, which meant that some of the immediate problems were allowed to fester and were obscured in the official data.

Reeves ran through a host of issues, but there were two big ones. The first was the lack of cash available to meet public sector pay settlements of any more than about 2 per cent. The second was that nearly all the estimated £6.4 billion cost of supporting asylum seekers was unfunded, in the sense of not appearing in the Home Office’s departmental budget.

What these two have in common, and what underlies a lot of this year’s problems, is that it is now nearly three years since we had a spending review, and hence since departmental spending totals were set. Quite a lot has happened since then. Inflation has been far higher than anticipated. The asylum bill has rocketed. What, in October 2021, looked like a generous set of spending allocations, now looks much less so, despite some top-ups.

Much of this was predictable. Anybody could have seen that public sector pay settlements were likely to be considerably in excess of the 2 per cent budgeted for, and not just to avoid strikes. Falling relative pay has made it harder and harder to recruit and retain teachers, nurses and other public sector workers. The costs of supporting asylum seekers are also no great surprise. Expected spending this year is only a billion or so higher than actual spending last year.

I certainly don’t buy the idea that the additional £9 billion or so that Reeves has now allocated to public sector pay is part of an unexpected black hole. There was always going to be a hole here. The only question was how big. For the same reason it was not credible for Jeremy Hunt to claim that planned departmental spending limits would hold. He may have decided to push back on pay review body recommendations, but there is no world in which 2 per cent rises would have happened and been sustained.

The costs of asylum are part of a much more complex picture. Before exploring the fiscal ins and outs, it is worth pausing on the sheer scale: £6.4 billion. About 100,000 people are receiving support for accommodation, of whom nearly 50,000 are being put up in hotels at a staggering cost of £3 billion a year. This is a monumental policy failure. Whatever the numbers coming in, the failure to process them and the failure to find better-value accommodation is unforgivable.

But what about the fact that this appeared to be “unfunded”? It is not in the Home Office budget, a fact to which the home affairs select committee has repeatedly drawn attention. Instead, the expectation seems to have been that the cost would be covered from the Treasury “reserve” — the contingency left over from departmental allocations intended to cover unexpected and urgent demands. That is broadly where the money came from last year. Not that it should have done. Largely predictable costs like this should appear in departmental budgets. My guess is that the last government did not want them in the Home Office budget because that would have increased the spending “baseline” for future settlements, pushing up the Office for Budget Responsibility’s spending forecasts and making it even harder to claim to be staying within the fiscal rules.

Now this is where I do have sympathy for the new chancellor. Although the asylum bill was largely predictable, what wasn’t clear from the outside was that the reserve had already in effect been spent on a veritable hotchpotch of demands including support for the Northern Ireland executive, paying for various outrageously expensive public inquiries, and additional costs of running the railways. What was also not apparent from the outside was that a number of new initiatives announced by the Conservatives were in effect unfunded within departmental budgets.

So, Labour did get even more of a hospital pass than it would have expected. That said, it is not right to put the predictable, and at least to some extent optional, costs of public pay increases in the same bucket as the genuine unknowns.

In terms of learning from all this, some of Reeves’s proposals make a lot of sense. Ensuring that a three-year spending review is carried out every two years strikes a good balance between giving some certainty while allowing adaptation to changing circumstances. Giving the Office for Budget Responsibility more capacity to get information on, and to challenge, departmental spending numbers should also increase transparency and accountability.

None of this, though, fundamentally changes the longer-term challenges. The chancellor cannot honestly announce a series of tax rises in her October budget, blame them on this hole that she has just discovered, and claim that she couldn’t have known pre-election that tax rises would be needed to maintain public services. That fact was obvious to all who cared to look. The politics that led the Conservatives to cut £20 billion from national insurance contributions and Labour to rule out either undoing that or increasing income tax or VAT could come back to haunt us. The danger is that we will get a series of much more complex, uncertain and economically risky tax rises in their place.

This article was first published in The Times, and is reproduced here with kind permission.