The Hunt-Reeves row over asylum spending highlights the dangers of planning with fake numbers

Spending on asylum was one of the big culprits behind the £22bn fiscal “black hole” identified in chancellor Rachel Reeves’s rapid fiscal audit published at the end of July. That suggested that the Home Office and Treasury’s best estimate for spending this year was well in excess of the budget planned by the Home Office – and well in excess of the budget for 2024/25 that the government had asked parliament to approve (the ‘main estimate’ in the jargon) just two weeks before.  

Departmental spending often does vary in year from expectation – unexpected things happen. But research by the Institute for Fiscal Studies  ¹³ https://ifs.org.uk/articles/home-office-budgeting-and-asylum-overspends  reveals a much murkier picture – of systematic lowballing of asylum spending in recent years, reflected in initial budgets and estimates, followed by a big claim on the ‘reserve’ and a later supplementary estimate presented to parliament for approval to bring spending authorisation in line with reality.  

Repeated reserve claims for asylum show a broken system of public expenditure management

The reserve is supposed to be used to cover the unexpected demands that happen in year. It is for genuine contingencies – compensation payments for the infected blood and Post Office scandals would be good examples – not to cover up massaged budgets. A one-off reserve claim for a department hit by a sudden change of trend on spending is forgivable. But the IFS shows that the Treasury has repeatedly allowed the Home Office access to the reserve since the end of the pandemic to cover overspends way in excess of initial budgets.  

Jeremy Hunt’s Treasury was complicit. Once the extent of asylum pressures became clearer, Treasury ministers and officials should have insisted that the Home Office budget more realistically at the start of the year – and they should have ensured that the Home Office’s accounting officer  ¹⁴ https://assets.publishing.service.gov.uk/media/65c4a3773f634b001242c6b7/Managing_Public_Money_-_May_2023_2.pdf  met his responsibility to present an estimate to parliament that was “taut and realistic”. Parliament has very limited opportunity to examine the estimates (the means by which parliament gives government authority to spend), which means its scrutiny is woeful, but there is no excuse for the Treasury and departments knowingly to present parliament with fake numbers. The fact that “asylum support spending is inherently volatile, and there was significant uncertainty over the course of the last spending review as to its trajectory, including in year” – as Home Office permanent secretary Matthew Rycroft stated in a letter to the Home Affairs and Public Accounts Select Committees  ¹⁵ https://www.independent.co.uk/news/uk/government-labour-yvette-cooper-matthew-rycroft-home-secretary-b2504330.html  – is no excuse for budgeting for a figure that was far lower than any reasonable central estimate of the costs.

The government cannot claim to be taken by surprise – the Home Affairs Select Committee has called out this practice in past reports

The row also highlights ambiguous accountabilities inside the Treasury about the management of the reserve. The Treasury gives departments assurances about funding unexpected spending commitments from the reserve. That Treasury assurance gives departmental accounting officers cover for these liabilities.

But no one has overall responsibility for accounting for the management of the reserve. Cabinet secretary Simon Case has written to Jeremy Hunt that it is “the role of ministers to decide, given advice on the scale of likely pressures, on the level at which the reserve should be set to avoid overcommitment, and not of accounting officers or senior civil servants”. And departmental accounting officers have duties to ensure the regularity and value for money or any specific claims they make on the reserve. But this leaves a gap. Treasury accounting officer James Bowler also needs to have the same accounting officer responsibilities for ensuring the appropriate use of reserve funding as departmental accounting officers have for their departmental budgets, including the power to request a direction if in his view the chancellor is making commitments about the reserve that do not meet the test of financial regularity or value for this money.  

Unrealistic budgeting contributed to the illusion of “headroom” in the spring budget

Asylum spending is – in theory at least – part of the Home Office’s cash limit. That means that, unlike welfare spending or tax receipts, the Office for Budget Responsibility (OBR) typically just assumes that the government will manage within the figures the government has set.  

Rachel Reeves’s fiscal audit revealed that that was not a safe assumption at the time of the 2024 budget – and the OBR is now conducting an investigation into the spending numbers it was given by HMT when it produced its forecast which allowed the last chancellor to spend “headroom” against the fiscal rules by cutting national insurance contributions further. That investigation should open the way towards Reeves’s proposal  ¹⁶ https://www.gov.uk/government/publications/fixing-the-foundations-public-spending-audit-2024-25  for more scrutiny by the OBR of the assumptions underpinning the in-year and year-ahead departmental expenditure limits – but it may also highlight the role of Treasury ministers and officials in signing off implausible but politically expedient figures.  

Rachel Reeves must ensure her spending review is not based on fantasy figures

Rachel Reeves has already highlighted and acted on the need to take action to right the fiscal wrongs of 2024/25. Even more important for Labour’s success will be the new plans for 2025/26 that it will set out in October’s budget – and then the results of the multi-year spending review which will conclude next spring.  

The starting point for those new plans must be realistic baselines for the spending that is happening now. The spending baselines that the Treasury agrees with departments should be published, alongside the key assumptions used to set them. This would improve accountability for ensuring those baselines accurately reflect ‘ongoing’ policy and help to avoid the kinds of unrealistic plans we have seen for asylum spending in recent years. Published baselines that set out the estimated costs of ongoing policy at a programme-level should then form the basis for negotiations between departments. 

Publishing the baselines would allow them to be independently scrutinised to assess whether they match the likely true costs of ‘ongoing’ policy to counteract the incentives that lead to over-optimistic baselines and spending plans. Plans for changes to spending allocations developed during the spending review should be subject to similar independent scrutiny.

The Treasury and the Home Office need to recognise that both have failed in their duties to parliament and taxpayers by failing to budget realistically for asylum spending. The Treasury needs to enforce its guidance to accounting officers, make clear that budgets must be demanding but deliverable and that access to the reserve will only be available for genuinely unanticipated costs. And normal accounting officer responsibilities should be extended to the Treasury’s management of the reserve. Reeves has already taken steps to stop a repeat of some of the previous government’s dubious accounting practices. But to further help ensure that these recent practices do not creep back in, Rachel Reeves should also make clear to Treasury officials that she will never sanction any similar kind of massaging of the figures