Cabinet ministers have been told they will not be able to use the Treasury reserve to fund public sector pay rises and cannot access it unless there are exceptional circumstances.
In the run-up to the budget, James Murray, the chief secretary to the Treasury, has written to ministers setting out a decision to clamp down on departments’ access to the reserve.
Any secretaries of state seeking to draw from it will need to demonstrate to the Treasury how they have exhausted all cost-cutting options before their claim is considered.
Murray told colleagues that “departments must take responsibility for managing pressures and making choices about priorities without relying on the reserve”. He wrote: “We must deliver the efficiency plans set out in June – reducing administrative budgets, including those of arm’s-length bodies and agencies – and deliver comprehensive digital transformation.”
The Treasury reserve is a source of backup funds intended to be used by departments in “genuinely unforeseen, unaffordable and unavoidable pressures”. However, it has recently been used to fund higher public-sector pay, military operations and compensation payouts.
Starting under the previous Conservative government, the Home Office has repeatedly relied on an annual top-up from the reserve to cover the cost of the asylum system, claiming £4.3bn in 2023-24.
The Home Office’s claims on the reserve in 2023-24 made up more than a quarter of the department’s total spending in that financial year, a larger proportion than for any other department.
The Treasury’s clampdown on this practice before the budget on 26 November forms an attempt to reduce government borrowing and keep departmental spending within the totals announced in the spending review in June.
This will help Rachel Reeves, the chancellor, stick to her borrowing rules; she wrote to ministers last month warning them that their access to the reserve would be restricted.
In his letter, Murray asked cabinet ministers to “respond to any pressures your department faces by making offsetting savings and by taking choices about reprioritisation”.
Departments will also be forced to repay any successful claims from the reserve – the value of which was £9bn last year and is expected to be halved this year – in future.
The largest claim on the reserve in 2023-24 – £18.5bn – was made by the Department for Education, which reflected a change in the valuation of the stock of student loan debt owed to the government. The Department of Health and Social Care claimed £2.8bn in the same year for NHS pay, costs of industrial action and extra NHS costs over the winter.
Reserve funds have also been used to fund military support for Ukraine and compensate post office operators after the Post Office Horizon IT scandal.
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Soon after she became chancellor, Reeves accused the Tories of regularly relying on the reserve to pay for unfunded commitments, contributing to the £22bn shortfall she said she had found in the public finances.
The chancellor told MPs in July 2024 that “the problem that the previous government got into was that every time they wanted to make a commitment, they said it would be paid for from the reserve”.
She said: “By the time I came into the Treasury on 5 July, that reserve had been spent three times over, because they put so many commitments into that reserve that they could not afford. That is the situation that we inherited, that is where the £22bn black hole comes from, and that is why I am having to make difficult decisions today to get a grip on the public finances.”
Experts have criticised successive governments for using the reserve in a way that appears to go against the spirit of Treasury guidance.
Reeves is still expected to announce tax rises in her budget next month to plug a spending gap estimated to stand at between £20bn and £40bn, amid an expected productivity downgrade by the Office for Budget Responsibility and a series of policy reversals, including scrapping plans for welfare cuts.
