| It’s less than two weeks until the budget – and the picture that Reeves has been painting is a pretty bleak one. By now, you are probably familiar with the claim that the Conservatives salted the earth so severely ahead of the election that the government will be forced to take emergency action. And you will have heard the arguments for and against that proposition – summarised by Paul Johnson, director of the IFS, as genuine dishonesty from the Tories but also “obvious to all who cared to look”. Until now, the government has been focusing on an estimated in-year shortfall of £22bn in its messaging around the budget – but yesterday’s front pages carried an alarming new number: an estimated £40bn in tax rises and spending cuts needed to avoid a return to austerity. You could be forgiven for thinking that the situation has just got an awful lot worse – but these numbers refer to different things. If Reeves is now talking about the second figure, that may be because she feels the need to prime the public for an even more drastic set of measures – or to make the reality of the budget feel less draconian when it lands. “Some of this is likely expectation management,” Zaranko said. “But it’s also about internal negotiations, and painting a dire picture may well suit the Treasury when it’s talking to government departments about their budgets.” (See Eleni Courea’s report from last night for more on this.) Meanwhile, Reeves is looking at the fiscal rules that act as guardrails on the government’s tax and spending decisions – and may be ready to make a significant change to give herself greater latitude to invest in public services. Here’s how all of that fits together. £22bn | The expected overspend this year This figure comes from a Treasury audit of public spending commissioned by Labour after it came to power. That report came back with an estimate of £21.9bn due to be spent in 2024-25 above the limits put in place by the Treasury. Although it’s pretty small as a proportion of overall public spending – expected to be about £1.226tn – it is a larger overspend than has been typical in recent years. Labour has been keen to paint this number as a “black hole” in the public finances, and you can see why: black holes are scary, massive and threaten to suck everything into them. The ones in space aren’t usually blamed on the Tories, but this one easily can be. But because “black hole” is also used in other contexts, it isn’t very helpful for anyone trying to understand what’s actually going on. “It makes it sound scarier than it is,” Zaranko said. “Calling it an overspend is more accurate and intelligible.” The really important thing to keep in mind about this figure is that it applies to the current financial year alone. “The big question is how much of it turns into a permanent problem for the government,” Zaranko said. “Money being spent on a one-off basis to send arms to Ukraine is very different to increases in public sector pay across the board, which will persist over time. “We think, very conservatively, that about half of the £22bn will prove permanent. Obviously, this feeds into the future picture – but the truth is that even if Reeves had taken a look at the books and declared the Treasury a black hole-free zone this year, she would have still had a similar challenge going into the budget.” Which brings us to … £40bn | The ongoing annual funding gap for day-to-day spending This number entered the political discourse yesterday. The FT, which first reported the story, described it as “the funding that Reeves needs to protect key government departments from real-terms spending cuts, cover the enduring impact of an annual £22bn overspend and build up a fiscal buffer for the remainder of the parliament”. Whereas the £22bn figure just refers to the picture in 2024-2025, “this refers to the challenge over the next few years”, Zaranko said. “We don’t know exactly how Reeves calculates it, but it is probably best understood as the amount that the government needs to find each year if it is going to meet its day-to-day spending commitments without borrowing.” Labour pledged that there would be no return to austerity, and although there may be spending cuts in some government departments, that means this figure mostly refers to how much will be needed in additional tax each year, which will be detailed by Reeves in the budget. It’s worth remembering that the government sets its own fiscal rules, and it could make different choices about how much it is allowed to borrow to meet its spending commitments. “There is some agency here,” Zaranko said. “This figure is really a measure of whether you’re hitting your self-imposed targets and, if you’re breaching them, by how much.” That means that another important factor in understanding these figures is how those rules were chosen. Which brings us to … The fiscal rules | Borrowing to invest in major projects, but not to cover day-to-day spending Nimo spoke to Richard Partington last week about the government’s approach to the fiscal rules, and last December Aditya Chakrabortty set out some of the objections to how they are devised. Here’s Aditya on the Conservatives’ rule, adopted by Labour, that debt should be on course to fall as a share of national income at the end of a five-year rolling period: | 