What lies beneath: How Rachel Reeves and her Treasury warned of a Budget black gap to justify tax rises – and what actually occurred with the general public funds

Rachel Reeves is under huge pressure after being accused of misleading voters over the state of the public finances ahead of last week’s Budget.

There are calls for the Chancellor to quit after the Office for Budget Responsibility (OBR) watchdog revealed it had privately told her there was no huge black hole in the nation’s books.

This is despite Ms Reeves having talked up the scale of the fiscal challenge she was facing ahead of the Budget, which she used to unveil £30billion of fresh tax rises.

Her dire economic warnings included an unusual pre-Budget speech on 4 November as she made the case for further levy hikes.

A large chunk of the extra £30billion being raised by Ms Reeves is going on more benefits spending, including the scrapping of the two-child benefit cap.

The Chancellor has insisted an OBR forecast showing a £4.2billion surplus against her borrowing rules – before she announced her Budget measures – would not have been enough ‘headroom’ in the public finances.

As she repeated her call for Ms Reeves to resign, Tory leader Kemi Badenoch said: ‘The Chancellor called an emergency press conference… about how terrible the state of the finances were.

‘And now we have seen that the OBR had told her the complete opposite.’

Here’s how Ms Reeves and the Treasury consistently warned of the challenge they were facing ahead of the Budget… and what was really happening with the public finances:

26 March

At her Spring Statement in March, the Chancellor restored a current budget surplus of £9.9billion.

This was exactly the same headroom she had left herself against her main fiscal rule as she did at her first Budget in October 2024.

3 September

In an interview with the BBC, Ms Reeves rejected claims she was facing a £50billion ‘black hole’ in the public finances ahead of her second Budget.

‘People who seem to know what is in the Budget before we have made those decisions are just wrong,’ she said, as she addressed speculation abour her plans.

‘A lot of them are talking rubbish, and frankly, a lot of what they’re saying is irresponsible.’

She added the National Institute of Economic and Social Research think tank, which estimated the £50billion gap, had ‘more than most got their numbers wrong in the last few years’. 

23 September

ITV’s Robert Peston published a blog which said the Treasury’s ‘working assumption’ ahead of the Budget is that taxes would need to increase by £30billion.

It added £20billion of that was due to the Office for Budget Responsibility (OBR) downgrading its productivity forecasts.

According to the blog post, ‘Government sources’ said it would be hard to identify £30billion of tax rises without breaching Labour’s manifesto pledge not to increase income tax, National Insurance, or VAT.

3 October

In its first round of forecasts for the public finances, which were sent to the Treasury on 3 October, the OBR found there was a ‘black hole’ of just £2.5billion.

The OBR added a 0.3 percentage point reduction in its productivity forecast had been ‘offset’ by increased tax revenues due to rises in real wages and inflation.

In a letter to the House of Commons’ Treasury Committee, OBR chief Richard Hughes has since revealed that ‘at no point’ was the gap in the public finances bigger than £2.5billion.

20 October

In the second set of OBR forecasts sent to the Treasury in the run-up to the Budget, the watchdog found there was a current budget surplus of £2.1billion.

27 October

The Financial Times reported that a downgrade to productivity forecasts by the OBR would open up a fresh hole in the public finances of more than £20billion.

A Labour official told the newspaper there was ‘fury’ in Downing Street and the Treasury that the OBR had decided to deliver the downgrade now, rather than before the 2024 general election. 

On the same day, the Chancellor acknowledged the OBR was likely to downgrade its productivity forecasts due to the UK’s ‘very poor’ record.

Speaking in Riyadh in Saudi Arabia, Ms Reeves also said she was ‘of course’ looking at tax increases – as well as spending cuts – in her bid to balance the books.

31 October

In the third set of OBR forecasts sent to the Treasury, the watchdog found there was a current budget surplus of £4.2billion.

In his letter to the Treasury Committee, Mr Hughes said there was ‘relatively little variation’ in the OBR’s forecasts ahead of the Budget.

4 November

In an unusual pre-Budget speech in Downing Street, Ms Reeves laid the ground for Labour to breach its manifesto pledge not to raise income tax, National Insurance, or VAT.

In an early-morning address to the nation, the Chancellor made the case for tax rises as she pointed to the OBR’s updating of its productivity forecasts.

‘If we are to build the future of Britain together, we will all have to contribute,’ Ms Reeves said, as she repeatedly refused to rule out manifesto-busting tax rises.

In what was branded a ‘laundry list of excuses’ by critics, the Chancellor also blamed Brexit, Donald Trump, Covid and the previous Tory government for the UK’s economic woes.

During her Downing Street speech, Ms Reeves did not reveal that the OBR had already told her its downgrade to productivity forecasts had been ‘offset’ by increased tax revenues.

10 November

In an interview with the BBC, Ms Reeves gave another signal she was preparing to tear up Labour’s manifesto pledges by hiking income tax.

‘It would, of course be possible to stick with the manifesto commitments, but that would require things like deep cuts in capital spending,’ she said.

‘And the reason why our productivity and our growth has been so poor these last few years is because governments have always taken the easy option to cut investment – in rail and road projects, in energy projects, in digital infrastructure.

‘And as a result, we’ve never managed to get our productivity back to where it was before the financial crisis.’

14 November

It was reported that Ms Reeves would abandon a planned 2p rise in income tax.

The Financial Times reported the Chancellor and Prime Minister Sir Keir Starmer had ‘ripped up’ proposals to raise the basic and higher income tax rates amid fears it would anger voters and Labour MPs.

The newspaper was told that Ms Reeves would instead pursure a ‘smorgasbord’ of other tax rises.

Government sources later said the change of heart came after improved forecasts from the OBR had left the Chancellor with a £20billion black hole to fill – far less than had been feared. 

26 November 

At her Budget, Ms Reeves unveiled £30billion of tax rises including a three-year extension to the freeze on income tax thresholds.

A large portion of the extra money went toward more benefits spending, including £3billion on axing the two-child cap on benefits. 

The OBR forecasts released alongside the Budget showed that Ms Reeves’ headroom had only been reduced by around £6billion since March.

The watchdog said the Chancellor now had a current budget surplus of £21.7billion.