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

Published

1 year ago

October 6, 2024

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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.

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PM faces ‘more unanswered questions’ after evidence in China spying case released

Published

1 hour ago

October 16, 2025

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Scale of Chinese espionage in UK revealed as evidence in collapsed spy trial is published

Sir Keir Starmer remains under pressure over the collapse of a trial into alleged Chinese spies after witness statements revealed the government’s deputy national security adviser had warned of significant espionage in the UK.

Three witness statements from the government were released late on Wednesday amid confusion about why the prosecutions of two men accused of spying for Beijing fell apart.

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Ex-parliamentary researcher Christopher Cash, 30, and teacher Christopher Berry, 33, were charged last year with passing politically sensitive information to a Chinese agent between December 2021 and February 2023.

They have both denied the allegations, and the case collapsed last month. The director of public prosecutions blamed the government’s refusal to brand China a threat, sparking accusations of a “cover-up”.

Sir Keir, who wants a “strategic and long-term” relationship with Beijing, used PMQs to announce witness statements from the case, made by deputy national security adviser Matthew Collins, would be published.

The PM has sought to blame the previous Tory government’s stance on China for the spying trial collapsing.

Sky News chief political correspondent Jon Craig said Sir Keir “will hope he’s got off the hook” by publishing the statements, but the Conservatives and Liberal Democrats say “they beg more questions than they answer”.

So what do the witness statements say?

In the first, from December 2023, Mr Collins said “large scale espionage” was being carried out against Britain.

A second, from February 2025, said Chinese spying threatened the economy.

In the documents, it was also revealed information about internal Tory politics – when the party was in government – was being fed to a Chinese intelligence handler known as “Alex”, according to counterterrorism command SO15.

This includes Mr Cash working as a researcher and “contributing to policy advice being provided to Rishi Sunak”.

The evidence adds: “It is axiomatic that this is prejudicial to the safety or interests of the UK for the Chinese state to have indirect access to one of the individuals providing policy advice to the now prime minister on China, with the potential to influence that advice.”

In the most recent third document from Mr Collins, dated 4 August, he said the Chinese intelligence services remain “highly capable and conduct large scale espionage operations against the UK”.

But he also quotes the Labour manifesto from last year’s election, saying: “It is important for me to emphasise, however, that the UK government is committed to pursuing a positive relationship with China to strengthen understanding, cooperation and stability.

“The government’s position is that we will co-operate where we can; compete where we need to; and challenge where we must, including on issues of national security.”

Sir Keir had suggested the “substantive” evidence in the case was submitted under the Tories, while supplementary statements given also reflected the previous government’s position.

Director of public prosecutions Stephen Parkinson said the evidence required from the government in the alleged spying case related to whether China could be considered an “enemy” under the Official Secrets Act.

None of the statements use that word.

‘Completely devoid of context’

Mr Cash and Mr Berry were both charged under the secrets act.

In a statement after the government published the statements, Mr Cash reiterated he was “completely innocent” and attacked his “trial by media”.

The collapse of the trial, meaning he can’t prove his innocence, has put him in an “impossible position”, he said.

“At no point did I intentionally assist Chinese intelligence,” he added.

Mr Cash described the statements as “completely devoid of the context that would have been given at trial”.

‘Yet more unanswered questions’

Sir Keir had previously said the government would not publish the evidence as it would not have been allowed by the CPS – before the CPS then denied this was the case.

Stephen Parkinson, the head of the CPS, said in a statement the prosecution was dropped after attempts to get more evidence from the government “over many months” proved unfruitful.

The Liberal Democrats are calling for a statutory inquiry, with the party’s foreign affairs spokesperson saying the published statements “raise yet more unanswered questions”.

Calum Miller MP said: “Did emphasising the government’s desire for a positive relationship with China effectively cause this trial to collapse? What evidence was the CPS requesting which the government failed to provide?

“And who was aware of these statements and the evidence being asked for both among ministers and in No 10?”

Sky’s Jon Craig said a number of Commons committees are likely to open their own inquiries into the case.

Politics

Be bold with tax hikes or risk ‘groundhog day’, chancellor told

Published

1 hour ago

October 16, 2025

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Go big with tax hikes or risk 'groundhog day', chancellor told

Rachel Reeves faces the prospect of another “groundhog day” unless next month’s budget goes further than plugging an estimated £22bn black hole in the public finances, according to a respected thinktank.

The Institute for Fiscal Studies (IFS) said there was a “strong case” for the chancellor to substantially increase the £10bn headroom she has previously given herself against her own debt rules, or risk further repeats of needing to restore the buffer in the years ahead.

It said Ms Reeves could bring the cost of servicing government debt down through ending constant chatter over the limited breathing space she has previously given herself, in uncertain times for the global economy.

The chancellor herself used an interview with Sky News this week to admit tax rises were being considered, and appeared to concede she was trapped in a “doom loom” of annual increases.

What is the chancellor facing?

Speculation over the likely contents of the budget has been rife for months and intensified after U-turns by the government on planned welfare reforms and on winter fuel payments.

The Office for Budget Responsibility’s determination on the size of the black hole facing Ms Reeves could come in well above or below the IFS estimate of £22bn, which includes the restoration of the £10bn headroom but not the cost of any possible policy announcements such as the scrapping of the two-child benefit cap.

Economists broadly agree tax rises are inevitable, as borrowing more would be prohibitive given the bond market’s concerns about the UK’s fiscal position.

Long-term borrowing costs have recently stood at levels not seen since the last century.

What are her tax options?

While there has been talk of new levies on bank profits and the wealthy, to name but a few rumours, the IFS analysis suggests the best way to raise the bulk of sufficient funds is by hiking income tax, rather than making the tax system even more complicated.

Earlier this week, it suggested reforms, such as to property taxes, could raise tens of billions of pounds.

But any move on income tax would mean breaking Labour’s manifesto pledge not to target the three main sources of revenue from income, employee national insurance contributions and VAT.

She is particularly unlikely to raise VAT, as it would risk fanning the flames of inflation, already expected by the International Monetary Fund to run at the highest rate across the G7 this year and next.

Business argues it should be spared.

The chancellor’s first budget, which raised taxes by £40bn, has been blamed by the sector for raising costs in the economy since April via higher minimum pay and employer national insurance contributions.

They say the measures have dragged on employment, investment, and growth.

‘A situation of her own making’

Analysis by Barclays, revealed within the IFS’s Green Budget, suggested inflation was on course to return to target by the middle of next year but that the UK’s jobless rate could top 5% from its current 4.8% level.

Ms Reeves, who has blamed the challenges she faces on past austerity, Brexit and a continuing drag from the mini-budget of the Liz Truss government in 2022, was urged by the IFS to not harm growth through budget measures.

IFS director Helen Miller said: “Last autumn, the chancellor confidently pronounced she wouldn’t be coming back with more tax rises; she almost certainly will.

“For Rachel Reeves, the budget will feel like groundhog day. This is, to a large extent, a situation of her own making.

“When choosing to operate her fiscal rules with such teeny tiny headroom, Ms Reeves would have known that run-of-the-mill forecast changes could easily blow her off course.”

Ms Miller said there was a “strong case for the chancellor to build more headroom against her fiscal rules”, adding: “Persistent uncertainty is damaging to the economic outlook.”

‘No return to austerity’

A Treasury spokesperson responded: “We won’t comment on speculation. The chancellor’s non-negotiable fiscal rules provide the stability needed to help to keep interest rates low while also prioritising investment to support long-term growth.

“We were the fastest-growing economy in the G7 in the first half of the year, but for too many people our economy feels stuck. They are working day in, day out without getting ahead.

“That needs to change, and that is why the chancellor will continue to relentlessly cut red tape, reform outdated planning rules, and invest in public infrastructure to boost growth – not return to austerity or decline.”

The budget is scheduled for 26 November.

Politics

Bank of England clarifies plan to limit stablecoins is temporary

Published

1 hour ago

October 16, 2025

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Bank of England clarifies plan to limit stablecoins is temporary

Industry groups criticized the proposed stablecoin limits, arguing that they would stifle innovation and signal to the industry that the UK isn’t crypto-friendly.