A curious thing about looking at a black hole in space is that the observer (who should keep a safe distance – at least a few quadrillion miles) sees all sides of it at once. The object’s unimaginable mass bends light around it from all angles: as in a cubist painting, perspective ceases to be relevant. The “hole” that appears in space is not a hole but the silhouette of an object that can never be seen, because its immense gravity devours light itself.
For readers wondering what this has to do with the Budget on 30 October, there are two key observations: firstly, black holes appear bigger than they are, and secondly, much about them is unknowable. Similar accusations have been levelled at the “black holes” that have appeared in political discourse since Labour began its overhaul of the public finances in July. Various figures have been quoted, from £22bn to £40bn to £100bn. Like the celestial bodies after which they are named, they are obscure and intimidating, and our information on them is largely based on theory.
On the Monday morning after the general election, Rachel Reeves asked Treasury officials to perform an audit on the government’s current spending. This would uncover the first of these black holes: £22bn, the amount by which the Treasury expected government departments to overshoot their budgets. Departments have “resource departmental expenditure limits”, or RDEL, set by the Treasury at each Budget, but the figures at Jeremy Hunt’s spring swansong were tens of billions off the amount central government actually needed to spend. This is largely because they were out of date: the government had not performed a spending review since 2021. Three years of economic upheaval – inflation, energy crisis, war, the Truss-Kwarteng debacle, strikes, a surge in asylum claims – had not been factored in to the needs of the British state, and the gap had been temporarily plugged by spending all of the Treasury reserve (the emergency funds reserved for “genuinely unforeseen” events). Jeremy Hunt cut taxes anyway, trimming National Insurance, fuel duty and the capital gains paid by landlords, although he knew the state could not afford it and would need to borrow an extra £12.6bn a year to pay for it.
Hunt refused to acknowledge the state of government finances: he knew it would soon be Labour’s problem. He has claimed it is “absolute nonsense” that Rachel Reeves was unaware of the state of government finances; she has said Hunt “knowingly and deliberately… lied” about it.
The truth is somewhere in between. Giles Wilkes, a former economic adviser to Theresa May and a senior fellow at the Institute for Government, says it was possible to tell “from a distance” that government departments didn’t appear to be spending as much as they needed to. Either the Conservatives had performed a miracle of efficiency in uncharacteristically coy fashion, or they were hiding something.
Labour doubtless suspected the latter, but they couldn’t be sure. “I don’t think you can really get down to that micro level when you’re in opposition,” Wilkes told me, “so you’ve got to take it at face value.” When the Treasury audit concluded, he said, “I think they were genuinely shocked. They all knew they were going to inherit a tight budgetary situation, which meant the standard Labour aspiration for running a high-investment state with decently funded public services was going to be really challenging. But I don’t think they expected the in-year numbers to be so far short, and the reserve to be totally blown.”
It is fair, he said, to call this a fiscal black hole: “If you come in and you find that the Home Office has £2bn for an asylum programme that costs £8bn, that feels to me like a proper use of the phrase.”
Other economists, however, believe the “black hole” metaphor is a dishonest way to frame political decisions. Ben Zaranko, senior research economist at the Institute for Fiscal Studies, said the phrase “takes away the agency of politicians” and makes contentious fiscal decisions – removing the winter fuel benefit from millions of pensioners, for example – “seem like something that’s an inevitable force of the universe, an unavoidable fact of reality”.
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The £22bn gap in day-to-day spending may have been caused by the last government’s incompetence, but it is also the result of choices the new government has made about how to deal with the situation: £9.4bn of the £22bn gap is the result of public sector pay deals, and a further £1.5bn corresponds to NHS emergency funding. Labour doubtless sees these as the right choices – but they were not the only options.
A government can talk itself into poor decision-making, Zaranko told me, when it tries to “chase the model” of economic forecasts. Policy is bent into awkward shapes to meet the government’s fiscal rules, which are in any case self-imposed, and when the forecast improves, a black hole in the Office for Budget Responsibility (OBR) forecast is replaced by another fiscal cliché, “headroom”, which can be used to justify opportunistic measures such as tax cuts. The result is policy made “on the basis of the whims of the forecast”.
This has been a problem for successive chancellors. In 2002, Gordon Brown was accused of using over-optimistic Treasury estimates to – as the then Tory leader Michael Howard put it – “adjust the economic cycle to fit your fiscal policy”. The result, Howard said, was “a black hole emerging in the public accounts”. In 2010, George Osborne asked the newly created OBR to find the “black holes” left in public spending by Labour; the devastating £81bn in spending cuts he announced later that year were aimed, he said, at “filling the hole in the public finances”.
The more honest number to talk about, according to Zaranko, is the £40bn figure that has also been misrepresented – by the Daily Express and George Osborne, among others – as a “black hole”, but which is fundamental to the choices that will be revealed in next week’s Budget. Very roughly, £40bn is the extra money the government needs to raise, through tax rises or spending cuts, to fulfil its manifesto commitments while reversing the austerity to which Jeremy Hunt had committed. It sums up the huge challenge this government faces in merely steadying the ship after the Conservatives’ abdication of responsibility.
The least meaningful figure, on the other hand, is the supermassive £100bn black hole that Reeves, perhaps after a few too many episodes of The Sky at Night, told cabinet ministers they faced over the next five years. When Rishi Sunak used the same trick (bumping a number up by extrapolating it over a whole parliament) to claim that Labour would “raise taxes by £2,000”, Treasury officials disowned the figures and Sunak was issued with a warning by the Office for Statistics Regulation. Rachel Reeves should get the same treatment if she pursues the £100bn number.
Every government should set boundaries for its fiscal plans, creating forecasts to ensure it stays within them. It is also important to remember forecasters are, to some extent, always wrong. They are also unelected: the OBR does not run the country. Voters elected Labour knowing it would raise taxes; the government should not pretend it has no choice but to do so.
[See also: Labour’s Big Tech gamble]
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This article appears in the 23 Oct 2024 issue of the New Statesman, The crisis candidate