Treasury denies breaking law over ‘black hole’ in public finances

The Treasury’s top officials has denied breaking the law over the £22 billion “black hole” Chancellor Rachel Reeves claimed to have found in the public finances.

Permanent secretary James Bowler said changes had been made in the way information is provided to the budget watchdog but insisted there had been no breach of the law ahead of Jeremy Hunt’s final financial statement in March.

The Office for Budget Responsibility’s chief Richard Hughes told MPs on Tuesday that there was around £9.5 billion of pressure on departments’ budgets “which they did not disclose to us (…) which under the law and under the Act they should have done”.

But Mr Bowler said: “It’s important to me to point out that I think we’re clear that the Treasury did act within the law.

“Indeed it’s because the law is more about what the OBR have the right to ask for, rather than what is provided to them of our own initiative, that we have needed to strengthen the framework as we are.”

In her first Budget in October Ms Reeves accepted 10 recommendations made by the OBR following the issues encountered in March.

The OBR launched a review and identified £9.5 billion in additional spending pressures which it said it should have been told about in February.

By the time of the election that figure had grown to £22 billion, the “black hole” which Ms Reeves has used as a political weapon to attack the Tories.

At the Commons Treasury Committee, Mr Bowler said that ahead of the March budget the OBR had been given a “top down” estimate of departmental spending.

That had worked “perfectly well in previous years, but it meant that there was a built-in assumption that if you did have pressures in-year, those would be offset, either by offsetting savings or by underspends”.

That was not the case in 2024/25, when the “pressures grew and the offsetting savings did not follow”.

Mr Bowler said that in future a “bottom up” approach to forecasting departmental expenditure limits would be used, with greater sharing of information.

Ms Reeves told the committee: “We knew there were big pressures coming down the line. What we didn’t know was that they were in the fiscal year that had already started.

“That was the big surprise, that the baseline that we were starting from did not reflect the true spending pressures.”

OBR chief Mr Hughes told the committee on Tuesday that he asked the Treasury “what were you aware about in terms of departmental pressures at the time we were putting together the March Budget?”.

He added: “The short answer was there were about £9.5 billion worth of net pressure on departments’ budgets which they did not disclose to us (…) which under the law and under the Act they should have done.”

Asked whether he thought the Treasury broke the law, Mr Hughes said: “They didn’t provide all of the information that we required to do our forecast.”

He said there may “have been a misunderstanding of how the law ought to be interpreted”.

Elsewhere, Ms Reeves downplayed the prospect of an overhaul of council tax rules when questioned by Tory MP Dame Harriett Baldwin on whether it might be replaced by a “broad-based property tax”.

The Chancellor said she had considered such changes but “it’s not something that we wanted to take forward” as “people have gone through a massive cost-of-living crisis” and increasing such levies beyond the 5% cap introduced by the previous government would not be “the right approach”.

She also told MPs the Government was “not looking at” road-pricing, which some campaigners have argued should replace fuel duty, after retaining a freeze on the current levy.

Asked whether she could rule out raising taxes further, Ms Reeves said she was not prepared to “write five years’ worth of budgets” in advance, but suggested the October statement had been a once-in-a-parliament “reset”.

“This Budget was a reset Budget. We’re not going to be repeating a budget like this again… I’m not going to be writing five years’ worth of budgets – imagine if that had been done in 2019,” she said.

“It would be naive to try and guess… but we have now drawn a line under the unrealistic path for public spending and also the trajectory for public finances and put those on a firm footing.”

One of the most controversial measures in the Budget was a change to inheritance tax rules for farms, which will see a tax of 20% raised on agricultural assets above £1 million.

Farming unions and opposition critics have demanded the Government reverse the move, which they argue will hamper food production and harm smaller farms.

Pressed on claims that the Government’s plans fail to do justice to the reality of land distribution, Ms Reeves said that the latest available figures showed the top 7% – the largest 117 claims – accounted for 40% of the total value of agricultural property relief.

The top 2% of claims – 37 – accounted for 22% of agricultural property relief, costing the taxpayer £119 million, she said.

“It is not possible to continue the rate of support that was previously available. I think we have got a fair balance,” the Chancellor told MPs.