Budget 2024: How fiscal rules are impeding long-term investments – and what Rachel Reeves can do about it

Published

12 months ago

October 6, 2024

admin

Before we get onto the budget and what Rachel Reeves might do to fiddle her fiscal rules and give herself a little more room to spend, I want you to ponder, for a moment, a recent report from the Office for Budget Responsibility (OBR).

This wasn’t one of those big OBR reports that get lots of attention – such as the documents and numbers it produces alongside each budget, full of the forecasts and analyses on the state of the economy and the public finances.

Instead, it was a chin-scratchy working paper that asked the question: if the government invests in something – say, a road or a railway, or a new school building – how long does it generally take for that investment to come good?

The answer, according to the report, was: actually quite a long time. Imagine the government spends a chunk of money – 1% of national income – on investment this year. In five years’ time that investment will only have created 0.4 per cent of GDP. In other words, in net terms, it’s costed us 0.6% of GDP.

But, and this is the important thing, look a little further off. A high-speed rail network is designed to last decades, and as those decades go on, it gradually improves people’s lives – think of the time saved by each commuter each day – small amounts each day, but they gradually mount up. So while the investment costs money in the short run, in the longer run, the benefits gradually mount.

The OBR’s calculation was that while a 1% of GDP public investment would only deliver 0.4% of GDP in five years, by the time 10 or 12 years had passed, the investment would be responsible for approaching 1% of GDP. In other words, it would have broken even. The money put in at the start would be fully earned back in benefits.

And by the time that investment was 50 years old, it would have delivered a whopping 2.5% of GDP in economic benefits. Future generations would benefit enormously – or so said the OBR’s sums.

Having laid that out, I want you now to ponder the fiscal rules Rachel Reeves is confronted with at this, her first budget. Most pressingly, ponder the so-called debt rule, which insists that the chancellor must have the national debt – well, technically it’s “public sector net debt excluding Bank of England interventions” – falling within five years.

There is, it’s worth underlining at this point, nothing fundamental about this rule. Reeves inherited it from the Conservative Party, who only dreamed it up a few years ago, after COVID. Back before then, there have been countless rules that were supposed to prevent the national debt falling and, frankly, rarely ever succeeded.

But since Reeves wanted everyone to know, ahead of the election, just how serious Labour was about managing the public finances, she decided she would keep those Tory rules. One can understand the politics of this; the economics, less so – then again, I confess I’ve always been a bit sceptical about all these rules.

The upshot is, to meet this rule, she needs the national debt to be falling between the fourth and fifth year of the OBR’s five-year forecast. And according to the last OBR forecasts, which date back to Jeremy Hunt‘s last budget, it is. But not by much: only by £8.9bn. If that number rings a bell, it is because this is the much-vaunted, but not much understood, “headroom” figure a lot of people in Westminster like to drone on about.

And – if you’re taking these rules very literally, which everyone in Westminster seems to be doing – then the takeaway is that the chancellor really doesn’t have much room left to spend in the coming budget. She only has £8.9bn extra leeway to borrow!

Every spending decision – whether on investment, on the NHS, on benefits or indeed on anything else, happens in the shadow of this terrifying £8.9bn headroom figure. And since the chancellor has already explained, in her “black hole” event earlier this year, that the Conservatives promised a lot of extra spending they hadn’t budgeted for – not, perhaps, the entire £22bn figure she likes to cite but still a fair chunk – then it stands to reason there’s really “no money left”.

Or is there? So far we’ve been taking the fiscal rules quite literally but at this stage it’s worth asking the question: why? First off, there’s nothing gospel about these rules. There’s no tablet of stone that says the national debt needs to be falling in five years’ time.

Second, remember what we learned from that OBR paper. Sometimes investments in things can actually generate more money than they cost. Yet fixating on a debt rule means the money you borrow to fund those investments is always counted as a negative – not a positive. And since the debt rule only looks five years into the future, you only ever see the cost and not the breakeven point.

Third, the debt rule used by this government actually focuses on a measure of the national debt which might not necessarily be the right one. That might sound odd until you realise there are actually quite a few different ways of expressing the scale of UK national debt.

The measure we currently use excludes the Bank of England, which seemed, a few years ago, to be a sensible thing to do. The Bank has been engaged in a policy called quantitative easing which involves buying and selling lots of government debt – which distorts the national debt. Perhaps it’s best to exclude it.

Except that recently those Bank of England interventions have actually been serving to drive up losses for the state. I won’t go into it in depth here for risk of causing a headache, but the upshot is most economists think focusing on a debt measure which is mostly being affected right now not by government decisions but by the central bank reversing a monetary policy exercise seems pretty perverse.

In other words, there’s a very strong argument that instead of focusing on the ex-BoE measure of net debt, the fiscal rules should instead be focusing on the overall measure of net debt. And here’s the thing: when you look at that measure of net debt, lo and behold it’s falling more between year four and five. In other words, there’s considerably more headroom: just under £25bn rather than just under £9bn based on that other Bank-excluding measure of debt.

Might Reeves declare, at the budget or in the run-up, that it makes far more sense to focus on overall PSND from now on? Quite plausibly. And while in one respect it’s a fiddle, in her defence it’s a fiddle from one silly rule to an ever so slightly less silly rule.

It would also mean she has more room to borrow to invest – if that’s what she chooses to do. But it doesn’t resolve the deeper issue: that both of these measures fixate on the short-term cost of debt without taking into account the long-term benefits of investment – back to that OBR paper.

If Reeves is determined to stick to the, some would say arbitrary, five-year deadline to get debt falling but wants to incorporate some measure of the benefits of investment, she could always choose one of two other measures for this rule.

She could focus on something called “public sector net financial liabilities” or “public sector net worth”. Both of these measures include some of the assets owned by the state as well as its debts – the upshot being that hopefully they reflect a little more of the benefits of investing more money.

The problem with these measures is they are subject to quite a lot of revision when, say, accountants change their opinion about the value of the national road or rail network. So some would argue these measures are prone to more volatility and fiddling than simple net debt.

Even so, these measures would dramatically transform the “headroom” picture. All of a sudden, Reeves would have over £60bn of headroom to play with. More than enough to splurge on loads of investments without breaking her fiscal rule.

There’s one other change to the rule that would probably make more sense than any of the above: changing that five-year deadline to a 10 or even 15-year deadline. At that kind of horizon, a pound spent on a decent investment would suddenly look net positive for the economy rather than a drain.

Whether Reeves wants to do any of the above depends, ultimately, on how she wants to begin her term in office. Does she want to establish herself as a tough, fiscally conservative Chancellor – with a view, perhaps, to relaxing in later years? Or does she feel it’s more important to begin investing early, so some of the potential benefits might be obvious within a decade or so?

Really, there’s nothing in the economics to stop her choosing either path. Certainly not a set of fiscal rules which are riddled with flaws.

Politics

Peers back assisted dying bill – but battles lie ahead

Published

1 day ago

September 19, 2025

admin

Peers back assisted dying bill - but battles lie ahead

The controversial assisted dying bill is still very much alive, having received a second reading in the House of Lords without a vote.

But that doesn’t tell the whole story. Day two of debate on the bill in the Lords was just as passionate and emotional as the first, a week earlier.

And now comes the hard part for supporters of Labour MP Kim Leadbeater’s Terminally Ill Adults (End of Life) Bill, as opponents attempt to make major changes in the months ahead.

The Lords’ chamber was again packed for the debate, which this time began at 10am and lasted nearly six hours. In all, during 13 hours of debate over two days, nearly 200 peers spoke.

According to one estimate, over both days of the debate only around 50 peers spoke in favour of the bill and considerably more than 100 against, with only a handful neutral.

The bill proposes allowing terminally ill adults in England and Wales with fewer than six months to live to apply for an assisted death. Scotland’s parliament has already passed a similar law.

In a safeguard introduced in the Commons, an application would have to be approved by two doctors and a panel featuring a social worker, senior lawyer and psychiatrist.

The bill’s sponsor in the Lords, Charlie Falconer, said while peers have “a job of work to do”, elected MPs in the Commons should have the final decision on the bill, not unelected peers.

One of the most contentious moments in the first day of debate last Friday was a powerful speech by former Tory prime minister Theresa May, who said the legislation was a “licence to kill” bill.

That claim prompted angry attacks on the former PM when the debate resumed from Labour peers, who said it had left them dismayed and caused distress to many terminally ill people.

The former PM, daughter of a church of England vicar, had claimed in her speech that the proposed law was an “assisted suicide bill” and “effectively says suicide is OK”.

But opening the second day’s debate, Baroness Thornton, a lay preacher and health minister in Tony Blair’s government, said: “People have written to me in the last week, very distressed.

“They say things such as: ‘We are not suicidal – we want to live – but we are dying, and we do not have the choice or ability to change that. Assisted dying is not suicide’.”

Throughout the criticism of her strong opposition to the bill, the former PM sat rooted to her seat, not reacting visibly but looking furious as her critics attacked her.

There was opposition to the bill, too, from grandees of the Thatcher and Major cabinets. Lord Deben, formerly John Gummer and an ex-member of the Church of England synod, said the bill “empowers the state to kill”.

And Lord Chris Patten, former Tory chairman, Hong Kong governor and Oxford University chancellor, said it was an “unholy legislative mess” and could lead to death becoming the “default solution to perceived suffering”.

Day two of the debate also saw an unholy clash between Church of England bishops past and present, with former Archbishop of Canterbury George Carey claiming opponents led by Archbishop of York Stephen Cottrell were out of touch with public opinion.

While a large group of bishops sat in their full robes on their benches, Lord Carey suggested both the Church and the Lords would “risk our legitimacy by claiming that we know better than both the public” and the Commons.

“Do we really want to stand in the way of this bill?” he challenged peers. “It will pass, whether in this session or the next. It has commanding support from the British public and passed the elected House after an unprecedented period of scrutiny.”

But Archbishop Cottrell hit back, declaring he was confident he represented “views held by many, not just Christian leaders, but faith leaders across our nation in whom I’ve been in discussion and written to me”.

And he said the bill was wrong “because it ruptures relationships” and would “turbocharge” the agonising choices facing poor and vulnerable people.

One of the most powerful speeches came from former Tory MP Craig Mackinlay, awarded a peerage by Rishi Sunak after a dramatic Commons comeback after losing his arms and legs after a bout of sepsis.

He shocked peers by revealing that in Belgium, terminally ill children as young as nine had been euthanised. “I’m concerned we want to embed an option for death in the NHS when its modus operandi should be for life,” he said.

And appearing via video link, a self-confessed “severely disabled” Tory peer, Kevin Shinkwin, was listened to in a stunned silence as he said the legislation amounted to the “stuff of nightmares”.

He said it would give the state “a licence to kill the wrong type of people”, adding: “I’m the wrong type. This bill effectively puts a price on my head.”

After the debate, Labour peer and former MP Baroness Luciana Berger, an opponent of the bill, claimed a victory after peers accepted her proposal to introduce a special committee to examine the bill and report by 7 November.

“The introduction of a select committee is a victory for those of us that want proper scrutiny of how these new laws would work, the massive changes they could make to the NHS and how we treat people at the end of their lives,” she told Sky News.

“It’s essential that as we look at these new laws we get a chance to hear from those government ministers and professionals that would be in charge of creating and running any new assisted dying system.”

After the select committee reports, at least four sitting Fridays in the Lords have been set aside for all peers – a Committee of the whole house – to debate the bill and propose amendments.

Report stage and third reading will follow early next year, then the bill goes back to the Commons for debate on any Lords amendments. There’s then every chance of parliamentary ping pong between the two Houses.

Kim Leadbeater’s bill may have cleared an important hurdle in the Lords. But there’s still a long way to go – and no doubt a fierce battle ahead – before it becomes law.

Politics

UK and Ireland agree deal to address ‘unfinished business’ of the Troubles

Published

1 day ago

September 19, 2025

admin

UK and Ireland agree deal to address 'unfinished business' of the Troubles

The UK and Irish governments have agreed a new framework to address the legacy of the Northern Ireland Troubles.

The framework, announced by Northern Ireland Secretary Hilary Benn and the Irish deputy prime minister, Simon Harris, at Hillsborough Castle on Friday, replaces the controversial Legacy Act, introduced by the Conservative government.

“I believe that this framework, underpinned by new co-operation from both our governments, represents the best way forward to finally make progress on the unfinished business of the Good Friday Agreement,” said Mr Benn.

He added that it would allow the families of victims killed during violence in Northern Ireland between the 1960s and 1990s, to “find the answers they have long been seeking”.

The proposed framework includes a dedicated Legacy Commission to investigate deaths during the Troubles, a resumption of inquests regarding cases from the conflict which were halted by the Legacy Act.

There will also be a separate truth recovery mechanism, the Independent Commission on Information Retrieval, jointly funded by London and Dublin.

“Dealing with the legacy of the Troubles is hard, and that is why it has been for so long the unfinished business of the Good Friday Agreement,” said Mr Benn.

Mr Harris described the framework as a “night and day improvement” on the previous act. Scrapping the Legacy Act, introduced in 2023, was a Labour government pledge.

What this means

A section of the Legacy Act offered immunity from prosecution for ex-soldiers and militants who cooperate with a new investigative body. This provision was ruled incompatible with human rights law.

The 2023 law was opposed by all political parties in Northern Ireland, including pro-British and Irish nationalist groups.

The Irish government, which brought a legal challenge against Britain at the European Court of Human Rights, also opposed it.

Both governments said the new plans will ensure it is possible to refer cases for potential prosecutions.

It will ‘take time’ to win families’ confidence

Irish Foreign Minister, Simon Harris, said in a statement that the framework could deliver on Ireland’s two tests of being human rights-compliant and securing the support of victims’ families, if implemented in good faith.

He added that winning the confidence of victims’ families would take time.

Dublin will revisit its legal challenge against Britain if the tests are met, it said.

Restoring strained relations

The UK’s Labour government had sought to reset relations with Ireland, after they were damaged by the process of Britain leaving the European Union.

The Conservative government had defended its previous approach, arguing prosecutions were unlikely to lead to convictions, and that it wanted to draw a line under the conflict.

A number of trials have collapsed in recent years, but the first former British soldier to be convicted of an offence since the peace deal was given a suspended sentenced in 2023.

Politics

Gary Gensler doubles down on crypto approach amid SEC sea change

Published

1 day ago

September 19, 2025

admin

Gary Gensler doubles down on crypto approach amid SEC sea change

The former SEC chair and Paul Atkins, the current head of the agency, both made media appearance this week to address significant policies proposed by US President Donald Trump.