Ahead of the Budget on 30 October 2024, control of public spending has been in the news a lot. One of HM Treasury’s tools for managing spending is its Reserve, something that is often mentioned but rarely explained.

In this Insight, we look at what the Reserve is for, how it has been used recently, and why it has sometimes been controversial.

What is the Reserve for?

All government departments agree “control totals” for their planned spending with the Treasury, which determine how much they are allowed to spend each year. These are set at Spending Reviews every few years, and generally updated at Budgets and other fiscal events each year.

Departments sometimes have to spend money on things that could not have been predicted at the time the spending plans were set. HM Treasury therefore sets aside a pot of funding each year called the Reserve (not to be confused with the Official Reserves, which are the government’s holdings of gold and foreign currencies).

How big is the Reserve?

At the last Spending Review in 2021, the level of the Reserve was set at about £14 billion to £16 billion a year between 2021/22 and 2024/25, and at the Spring Budget in March 2024 it was set at £11.0 billion for 2024/25. Although this is a huge amount of money by most standards, it is relatively small compared with government budgets as a whole (making up around 3% of all planned departmental spending).

When can government departments access the Reserve?

According to the Treasury’s budgeting guidance, the Reserve is only for “genuinely unforeseen, unaffordable and unavoidable pressures” that cannot be absorbed within departments’ existing budgets.  It can also be used for “certain special cases of expenditure that would otherwise be difficult to manage”. If this guidance is followed, it should mean that the departmental Main Estimates, approved by Parliament in the first few months of the financial year, represent a reasonably good forecast of what departments will actually spend.

The process for making a Reserve claim is detailed in practice but formally very simple, according to a June 2016 report by the think tank ODI (Overseas Development Institute). It only requires the government department that wants to make a Reserve claim to write a letter to the Treasury, although this always follows discussions between officials at several levels.

Reserve claims are also affected by the political context: a department that has the backing of the Prime Minister may be able to secure extra funding despite the Treasury’s controls.

Which departments make the biggest Reserve claims?

Most Reserve claims are listed in the Supplementary Estimates, the revised budgets that government departments submit to Parliament towards the end of each financial year. They are not provided in any consistent format, so it can be hard to compare amounts over time. However, we can summarise the largest Reserve allocations in the 2023/24 Supplementary Estimates as follows:

  • The largest claim by far was made by the Department for Education. The department claimed £18.5 billion (accounting for 45% of all Reserve claims), reflecting a change in the valuation of the stock of student loan debt owed to the government. Although this year’s adjustment was particularly large, the revaluation of student loan debt takes place every year and does not involve any actual cash spending.
  • The second largest claim was made by the Home Office. The department claimed £4.3 billion (11% of all Reserve claims) for asylum system costs (including, for example, asylum seeker accommodation). The government was criticised by the Home Affairs Select Committee and the Institute for Fiscal Studies think tank for putting the majority of its asylum funding through as a Reserve claim, as this meant that its Main Estimate for the year was unrealistically low.
  • The third largest claim was made by the Department of Health and Social Care. The department claimed £2.8 billion (7% of all Reserve claims) for NHS pay, costs of industrial action and extra NHS costs over the winter.

As the chart below shows, the Home Office’s claims on the Reserve in 2023/24 made up over a quarter of the department’s total spending in that financial year. This was a larger proportion than for any other department.

However, the Department for Business and Trade came close to this in proportional terms. As explained in the department’s memorandum accompanying its Estimate (PDF), this is largely because of Reserve claims to compensate postmasters after the Post Office Horizon IT scandal and related costs (which totalled £338 million), and a capital injection for the British Business Bank (£343 million).

Two bar charts showing Reserve claims in the 2023/24 Supplementary Estimates. The first chart shows that the Department for Education claimed the most in absolute terms (£18.5 billion), followed by the Home Office (£6.3 billion) and the Department for Transport (£4.8 billion). The second chart shows that as a proportion of the department’s total spending, the Home Office had the largest Reserve claims (27.1% of all spending), followed by the Department for Business and Trade (22.0%) and the Department for Transport (14.8%).

Why has use of the Reserve been controversial?

The Reserve has sometimes been used in ways that do not seem to match the Treasury’s guidance. For example, all additional costs of military operations are met from the Reserve rather than from the Ministry of Defence’s core budget, regardless of whether that spending could be foreseen at the start of the financial year. The Ministry of Defence said this has “always” been the case in evidence submitted to the Defence Committee in 2016. Military support for Ukraine since 2022 has also been funded by the Reserve, as has a large proportion of Home Office spending on asylum support in recent years (see above).

In her statement on 29 July 2024, the Chancellor announced that £8.6 billion of Reserve claims had already been paid out in the first three months of the year. This is close to the planned Reserve level of £9.2 billion (in day-to-day spending) set at the 2024 Spring Budget. She also listed several other spending pressures that would increase the total further, and accused the previous government of spending the Reserve “more than three times over only three months into the financial year”.

In his response, the Shadow Chancellor said that the allocated Reserve was larger than the Chancellor had said, and that the Chancellor’s figures did not include either underspending by departments or the Treasury’s ability to reduce spending pressures during the year.

The Fraser of Allander Institute at the University of Strathclyde has also published an article on the Chancellor’s statement. The article suggests that use of the Reserve by government departments often appears to go against the spirit of Treasury guidance. It also argues that the Treasury is not being transparent by refusing to disclose more details about departmental claims on the Reserve.

Photo by: HM Treasury via Flickr.