Departments will be asked to cut 2% from their administration budgets, Rachel Reeves has said, after an audit of public finances identified a projected overspend of £22bn.
The chancellor has also called an immediate halt to “non-essential” spending on external consultants and government communications.
These departmental efficiencies will contribute to efforts to save £13bn in savings over the next two years, which will also include scrapping several unfunded policies and cutting others back, according to the chancellor.
The public spending audit, which Reeves ordered earlier this month, found that unfunded spending commitments, the impact of inflation and pressure caused by recent events such as the need to provide military assistance to Ukraine and the rising cost of accommodating asylum seekers, mean the government has “inherited a projected overspend of £22bn”, she told MPs this afternoon.
Departments are expected to slice £3.15bn off their budgets this year, and the same next year. The 2% savings to what Reeves called "back-office costs", will save £225m a year, while cutting out non-essential comms will save £50m a year, according to the Treasury.
Added to Labour's existing commitment to halve consultancy spending from 2025-26, stopping non-essential spending on consulting this year is expected to help save £1.23bn over the next two years.
Reeves used the review to confirm that the civil service headcount cap announced by her predecessor, Jeremy Hunt, last year has been lifted “to help departments [cut consultancy spending] and make value for money decisions about how to resource work”.
The government will continue to sell off parts of the public sector property portfolio that it no longer needs, the Treasury said – but did not put a figure on how much this might raise.
Pressures on public finances
In her impassioned speech to the House of Commons this afternoon, the chancellor accused the previous Conservative government of making "unfunded commitment after unfunded commitment, knowing the money was not there".
"I am not talking about the state of public services in the future, like the crisis in our prisons, which they have left for us to fix," she said.
"I am talking about the money they were spending this year and had no ability to pay for, which they hid from the country."
She named a handful of policies that she described as "unfunded and undisclosed", including a projected overspend on the asylum system of more than £6.4bn this year.
Altogether, unfunded policy decisions made since the last spending review have increased pressures on public spending in 2024-25 by £2.6bn, the chancellor said.
The savings push – which aims to cut £5.5bn in 2024-25 and £8.1bn in 2025-26 – will scrap some existing spending commitments, including the Ministry of Housing, Communities and Local Government’s Investment Opportunity Fund, adult social-care charging reforms and the Advanced British Standard qualification.
Reeves also highlighted a number of recent events that have contributed to the overspend. They include Russia's invasion of Ukraine, after which the UK government contributed military aid to Ukraine; a rise in the number of asylum seekers seeking to come to the UK; a drop in demand for rail services since the start of the Covid pandemic; and industrial action by rail companies.
The chancellor said the spending audit had found there was “not enough money set aside for the reserve to fund" all the costs associated with these events.
“We will continue to honour these commitments in full, and unlike the previous government, we will make sure that they are always fully funded,” she said.
She said inflation – which hit 11% at its peak in 2022 – had added to this strain on the public finances. The last spending review was in 2021, which meant the impact of inflation was “never fully reflected” in departmental budgets, the chancellor said.
The 2021 spending review set overall budgets in cash terms on an assumption that pay for public sector workforces would increase by around 3%, 2%, and 2% respectively in the three years it covered.
But actual pay rises for most public services were higher because they were based on recommendations from independent pay review bodies – averaging 5% in 2022-23 and 6% in 2023-24 across most public services.
This disparity, as well as some exceptional pay increases agreed and pay awards across the civil service – which does not have an independent pay review body for its delegated grades – means spending on public sector pay is expected to be around £11-12bn higher across central government departments in 2024-25, the review said. This is before accounting for 2024-25 pay awards.
The previous government “did not provide any indication of what was set aside in budgets for pay” in its written evidence to the pay review bodies, according to the Treasury.
This year’s pay awards for pay review body workforces – which were published alongside the speech – and the civil service will cost £9.4bn more than the cash set aside for pay this year, the document says.