What does Britain’s £20bn ‘black hole’ mean for you and your money? Experts explain

Britain is “broke and broken”, with chancellor Rachel Reeves announcing spending cuts in the House of Commons today (29 July) to deal with a £20bn “black hole” in the public finances. 

The new Labour government says the Conservatives hid the extent of the bad finances, leaving their successors the worst inheritance since the war. Before the election, Starmer told the Big Issue there would be no return to austerity on his watch.

But the latest move from Reeves has raised expectations of tax rises and public spending cuts. We’ve asked experts what lies behind the latest economic positioning from the new government.

What’s behind the £20bn black hole in Rachel Reeves’s speech?

There is no fundamental law of the universe behind a “black hole” in the public finances. It was rhetoric also used by the Conservative government. But it lies in the fiscal rules chosen by the Treasury. Starmer and Reeves have chosen to stick to the fiscal rules laid out by Jeremy Hunt – governing the level of debt the government is willing to take on.

“The black hole, insofar as it has been briefed out, seems to consist of spending commitments that were pencilled in at the departmental level or announced in some form by Conservative ministers, but for which no resources were explicitly set aside,” said Nick O’Donovan, a political economist at Keele Business School.

“That’s perfectly valid conceptually – undisclosed liabilities is a meaningful concept in the world of finance, and the kind of thing audits and due diligence should pick up in private sector organisations.”

Labour ministers have also blamed the Conservatives for obscuring the true state of the public finances. This is perfectly feasible, added O’Donovan.

The government provides the Office for Budget Responsibility (OBR) with headline figures to make its forecasts, and these are put in the public domain. But, said Donovan, the OBR does not check whether they are realistic.

“But there is a significant difference between the government declaring headline figures for public spending that were unrealistic, and the government declaring headline figures that were – deliberately or accidentally – misleading about the government’s existing spending plans/commitments,” said O’Donovan.

“That also means that addressing shortfalls in public services may require more than simply addressing this £20bn black hole.”

Why is Labour doing this?

Reeves’ speech comes alongside the widespread expectation that Labour will give public sector workers a 5.5% pay rise and ongoing controversy over a refusal to lift the two-child benefit cap. After an election campaign when Starmer positioned his party as a pragmatic custodian of the economy, there are politics at play.

“Even though Labour ran an election campaign promising to avoid both largescale tax increases or any future austerity, Reeves has long known that something is going to have to give,” said Marc Stears, director of the UCL Policy Lab. 

Added O’Donovan: “Personally, I think it is politically risky for Labour to place too much emphasis on these undisclosed liabilities, as the general public might then assume that freeing up an additional £20bn will be enough to address shortcomings in public services or infrastructure”

What does the £20bn ‘black hole’ mean for public services and spending cuts?

Cuts are likely to include projects planned during the Conservatives’ time in office, including 40 new hospitals and the controversial Stonehenge road tunnel.

Alongside this, Reeves will introduce an “office of value for money”, sell public buildings and reduce “non-essential” spending on consultants.

This is likely to be accompanied by a juggling act from Reeves, said Stears.

“In addition to her criticisms of the previous regime, it is likely that we will see some initial cuts announced by the chancellor today – especially to expensive infrastructure projects – as a precursor to both targeted tax and spending increases later,” he said.

“Reeves will be trying as hard as she can to avoid those tax rises falling on ordinary working families and she will be seeking too for the best possible return on any spending increases, including by tying new funding for public services to plans for longer term reform. 

“But it is going to be a very bumpy few weeks for the new government. Both its future popularity and its chances of actual success, will depend on getting these choices right.”

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