Chancellor Rachel Reeves will deliver her first budget at the end of October, providing the first chance for her to change the fiscal rules.
Upon entering government in July, the government said the Conservatives left it with a £22bn black hole, so the chancellor is expected to use the 30 October budget to raise some of that.
Ms Reeves said in November, when asked if she would consider changing the debt target, she was “not going to fiddle the figures or make something to get different results”.
However, she is being urged to alter the rules to let the government access £57bn, according to the Institute for Public Policy Research (IPPR) thinktank.
And during Prime Minister’s Questions on 9 October, Sir Keir Starmer refused to answer if he agreed with the chancellor’s November statement, prompting some to speculate the government may change the fiscal rules.
Sky News looks at what a fiscal rule is, what the Labour government’s rules are and how they could change.
What are fiscal rules?
A fiscal rule is a limit or restriction governments put in place to constrain how much they can borrow to fund public spending.
They can be set by an independent body but since 1997 UK governments have set their own constraints.
Rules apply to the fiscal deficit – the gap between public expenditure and tax revenues in a year – the public debt – the total amount borrowed to finance past deficits – or public spending relative to GDP.
In 2010, the Office for Budget Responsibility (OBR) was set up to remove the Treasury’s ultimate control over the forecasts that underpin fiscal policy.
The Economics Observatory said the OBR’s creation means fiscal rules should be seen as an “expression of a government’s objectives, not something that dictates those objectives”.
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What are the current fiscal rules?
The Labour Party’s manifesto laid out the new government’s fiscal rules, describing them as “non-negotiable”. They are:
1) The current budget must move into balance so day-to-day costs are met by revenues
2) Debt must be falling as a percentage of GDP by the fifth year of the forecast – this was carried over from the Conservative government.
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Will Rachel Reeves U-turn on her budget promise?
How could the fiscal rules change?
The rules themselves are not expected to change.
However, the chancellor could change how debt is calculated, which could in turn change how much debt the UK officially has and give Ms Reeves room to borrow more.
Ms Reeves told the Labour conference “borrowing for investment” is the only plausible solution to the UK’s productivity crisis.
By changing her definition of debt, she could find up to £50bn in additional headroom.
However, the Institute for Fiscal Studies (IFS) has warned against borrowing that much money.
Paul Johnson, director of the IFS, said Labour’s pledge not to increase income tax, national insurance or VAT, coupled with a promise to balance the current budget, means she will not be able to free up additional resources for day-to-day spending.
Bank of England governor Andrew Bailey introduced quantitative tightening in 2022
Quantitative Easing
An idea the chancellor is said to be weighing up is excluding the £20bn to £50bn annual losses being incurred by the Bank of England winding down its quantitative easing (QE) bond-buying programme.
Since the 2008 financial crisis, the Bank of England has repeatedly used QE to stimulate the economy and meet the 2% inflation target – creating £875bn of new money in 13 years.
During QE, the Bank buys bonds (debt security issued by the government) to push up their prices and bring down long-term interest rates on savings and loans.
Read more:
How fiscal rules are impeding long-term investments – and what Rachel Reeves can do about it
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Since November 2022, the Bank has been carrying out quantitative tightening, where it does not buy other bonds when bonds it holds mature, or by actively selling bonds to investors, or a combination of the two.
The aim is not to affect interest rates or inflation but to ensure it is possible QE can happen again in the future, if needed.
In February, the cross-party Treasury committee raised concerns quantitative tightening could have losses of between £50bn and £130bn and said it could have “huge implications” for public spending over the next decade.
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What will the budget include?
Exclude new institutions
There are suggestions the chancellor could move GB Energy and the National Wealth Fund, both created by Labour, off the government’s books.
Andy King, a former senior official at the OBR, estimates that could unlock a further £15bn for borrowing.
Exclude projects
Another option would be to exclude certain projects from the debt calculation.
Government officials have said they are working on a plan to publish estimates for how much new capital projects could stimulate growth and how much money they would generate directly for the Treasury.
