Treasury ‘might have damaged regulation’ by failing to disclose £9.5billion black gap in Tory Budget

The Treasury may have broken the law by failing to reveal a near £10billion black hole which the Labour government ended up inheriting, MPs were told

The head of Office for Budget Responsibility slammed officials for what happened, saying it led to a “systemic failure” in forecasts the watchdog published alongside the Budget in March.

The dressing down comes in the wake of Labour’s claim that the Tories left a £22billion black hole in the public finances. The OBR last week said instead that it had found £9.5billion of departmental spending it had not been aware of ahead Tory Chancellor Jeremy Hunt’s last Budget.

But Richard Hughes, its chair, went further by hinting that Treasury staff may have broken the law by not giving it the figures. Mr Hughes told MPs it had a “high trust relationship with the Treasury” but added “that system clearly broke down.”

The emergence of the black hole only came to light in July, when Labour Chancellor Rachel Reeves says she first became aware of it. “That information was not shared with us at the time of the March Budget and it was information that was available to the Treasury at the time,” Mr Hughes said in evidence to the Commons Treasury Committee.

Dame Meg Hillier, the Labour chair of the committee, asked Mr Hughes whether that meant the Treasury had broken the law by not doing so. Mr Hughes would only say: “They didn’t provide all the information that was required to do our forecast.”

The fall-out came as MPs grilled Mr Hughes and other OBR officials on the impact of the Labour’s Budget last week, which included huge tax rises to tackle chronic underfunding of public services left by the Tories.

Mr Hughes said half of the £40billion a year of tax increases announced are “quite uncertain”. The OBR says the controversial hike in employers’ national insurance would guarantee the bulk of the extra taxes earmarked by Ms Reeves.

But Mr Hughes said: “The other half is based on raising taxes on a relatively small number of individuals for which the revenues are quite uncertain because of how they will respond.” He also warned that interest rates would “take longer to come down than they would prior to the Budget.”

That is not only a problem for borrowers, but the government too, as the hearing was told even a 0.3% increase in rates – were that needed should inflation rise more than expected – would wipe out the Chancellor’s ”headroom”, the money left over in the budget to spend without breaking fiscal rules.

Ms Reeves’s £22billion estimate for the black hole left by the Tories is “not unreasonable”, a former member of the Budget watchdog has said. Andy King, who was a member of the OBR until last year, lent support to the Treasury’s claim that the Conservatives left a massive shortfall in the public finances.

The Tories have furiously disputed the figure put forward by Ms Reeves. But Mr King, who is now a partner at Flint Global, told MPs that it was clear that the Treasury should have passed on information the OBR.

He said: “I wasn’t there, did they ask the right question? Did they offer the right information? Ideally that should have been known and factored into the forecast at the time.” He added: “It’s not an unreasonable number to think was a pressure on the budgets.”