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.
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Image: Sir Keir Starmer and Rachel Reeves at the Labour conference. Pic: PA
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.
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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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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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2:23
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.
Image: 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.
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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2:41
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.
There was one clear, united message from today’s virtual meeting of leaders – that they rejected Vladimir Putin’s “yes, but” approach to a ceasefire.
The “coalition of the willing” – the 27 leaders, plus NATO and the EU led by Sir Keir Starmer and Emmanuel Macron – want the Russian president to mirror Ukraine’s pledge for a 30-day pause in fighting, in order to hammer out a sustainable peace deal.
Sir Keir made that very clear, and suggested the attendees at the meeting were behind this approach.
The prime minister said: “Volodymyr [Zelenskyy] has committed to a 30-day unconditional ceasefire, but Mr Putin is trying to delay, saying there must be a painstaking study before a ceasefire can take place.
“Well, the world needs action, not a study, not empty words and conditions. So my message is very clear. Sooner or later, Putin will have to come to the table.”
Image: ‘Coalition of the willing’. Pic: Downing Street
There are two reasons for this challenge – an immediate end to fighting is a goal in itself, but many of those in today’s call, including Sir Keir, do not trust Mr Putin to uphold promises on peace and are trying to convince US President Donald Trump to be more clear-eyed about the Russian approach.
Challenging the Russian leader to follow the US request for a ceasefire and watching him refuse is designed to send a message to the White House as well as the Kremlin.
There were, however, bigger unknowns left hanging.
One of which was the clear signal from Sir Keir that he is still relying on a US security guarantee in order to bring on board a “coalition of the willing” who might be able to provide troops to Ukraine.
There are, however, many that don’t think that that US security guarantee is coming in any substantial way, based on the noises coming out of the US.
That is a big problem for the PM, as government sources tell me that the scope and the remit of any potential peacekeeping force is determined by what protection the US might be able to provide.
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The second issue that is being sidestepped by Sir Keir is what any peace keeping might be able to do in practice.
UK troops, like those of any NATO country, cannot engage directly with Russia in combat for fear of triggering a much bigger conflagration.
So if not that, then what is their purpose – a question repeatedly asked by experts like the former national security adviser Lord Ricketts.
I put exactly this to the PM, but did not get an answer. He suggested that we were a long way away from getting an an answer, even though military chiefs also appear to be meeting to “operationalise” plans on Thursday.
How can they operationalise a plan that does not, and currently cannot, have a remit?
Today Sir Keir heralded the participation of Canada, Australia and New Zealand on the call, as part of the effort.
But if the remit of the coalition of the willing isn’t clear, how can it truly be effective?
Sir Keir Starmer will host a virtual meeting of world leaders today to discuss peacekeeping in Ukraine, and he will use the call to say that now is the time for “concrete commitments”, Downing Street has said.
Around 25 leaders are expected to join the call this morning, in which they will discuss in more detail the peacekeeping mission the prime minister has called the ‘coalition of the willing’.
Sir Keir will ask allies to continue to ramp up military support to Ukraine.
He will also say countries need to increase economic pressure on Russia in the short term, and be prepared to support an eventual peace deal over the long term, should an agreement be reached.
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Attendees will also receive an update on the discussions of defence ministers and military chiefs in Paris this week, and they will all set out details of their own efforts to unlock further military support for Ukraine.
Downing Street has confirmed that some European countries, the EU Commission, NATO, Canada, Ukraine, Australia and New Zealand are expected to join the virtual meeting.
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1:27
Is a ceasefire in Ukraine still viable?
Starmer: The world needs to see action
In a statement ahead of the call, the prime minister said: “We can’t allow President Putin to play games with President Trump’s deal.
“The Kremlin’s complete disregard for President Trump’s ceasefire proposal only serves to demonstrate that Putin is not serious about peace.
“If Russia finally comes to the table, then we must be ready to monitor a ceasefire to ensure it is a serious and enduring peace, if they don’t, then we need to strain every sinew to ramp up economic pressure on Russia to secure an end to this war.”
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3:47
Peace ‘must be secure’, PM tells Sky News
He went on to accuse the Russian president of “trying to delay” by “saying there must be a painstaking study before a ceasefire can take place”.
“The world needs to see action, not a study or empty words and pointless conditions,” he continued.
“My message to the Kremlin could not be clearer: stop the barbaric attacks on Ukraine, once and for all, and agree to a ceasefire now. Until then, we will keep working around the clock to deliver peace.”
Sir Keir has said Britain could send peacekeepers to Ukraine in the event of a ceasefire deal, but has called on Washington to offer a security ‘backstop’ to those forces.
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2:14
Putin lists ceasefire conditions
Moscow has reportedly also presented a “list of demands” to the US to end the war, which would include international recognition of Russia’s claim to Crimea and four Ukrainian provinces and an agreement that foreign troops not be deployed in Ukraine.
Ukraine’s President Volodymyr Zelenskyy said Mr Putin’s remarks were “very predictable” and “very manipulative”, adding that the Russian president was preparing to reject the ceasefire proposal he agreed with the US.
The chancellor has insisted that “we do need to get a grip” on the welfare budget, saying the “current system is not working for anyone”.
Rachel Reeves said the “bill for welfare is going up by billions of pounds in the next few years”, and argued the system should “get people into work so that more people can fulfil their potential”.
Her comments come ahead of an expected announcement next week of “radical” reforms to the welfare system, with many fearing drastic cuts to support for the most vulnerable.
Asked by broadcasters on Friday about those fears, the chancellor said: “Well, we’ll set out our plans for welfare reform. But it is absolutely clear that the current system is not working for anyone.
“It is not working for people who need support, it’s not working to get people into work so that more people can fulfil their potential, and it’s not working for the taxpayer when the bill for welfare is going up by billions of pounds in the next few years.
“So we do need to get a grip. We need to spend more on national defence, we need to reform our public services, and we need to reform our broken welfare system.”
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3:05
Welfare system ‘letting people down’
Ms Reeves’s comments come after the work and pensions secretary said the current system has locked “millions” out of work and called it “dysfunctional” as the system places a person in binary categories of either “fit for work” or “not fit for work”.
The government has promised to either reform or replace the Work Capability Assessment – which determines if a person is fit for work or not – as they say it currently drives people who want to work “to a life on benefits”.
Ministers have been priming MPs and the public for cuts to a ballooning welfare bill since the start of the year, with details expected next week ahead of an announcement in the chancellor’s spring statement on 26 March.
Image: Rachel Reeves during a visit Babcock in Rosyth. Pic: PA
The expected welfare cuts
Ms Reeves is expected to announce several billion pounds of spending cuts after losing her £9.9bn headroom since the October budget, with the welfare budget a key target for cuts.
Fiscal headroom is the amount by which government can increase spending or cut taxes without breaking its own fiscal rules.
The welfare cuts are expected to include £5bn in savings by making it harder to qualify for Personal Independent Payments (PIP), which help people with the additional costs of their disability.
PIP payments next year are also expected to be frozen and the basic rate for Universal Credit paid to those searching for work, or in work, is expected to be increased while the rate for those judged as unfit for work will be cut.
The department for work and pensions said new figures show 1.8 million people are now considered too sick to look for work due to a “broken work capability assessment” so are on Universal Credit but getting no support to find work.
It said the number has almost quadrupled since the start of the pandemic when 360,000 were considered too sick to look for work.
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0:52
‘Government’s plan to cut welfare is terrifying’
Labour MPs concerned about cuts
A growing number of Labour MPs are publicly raising concerns and, in an unusual move, all 404 Labour MPs were asked to attend “welfare roundtables” in Downing Street with the Number 10 policy unit on Wednesday and Thursday.
On Wednesday, Sir Keir Starmer faced down Labour MPs unhappy over the rumoured welfare cuts – especially for disabled people.
Richard Burgon pleaded with him to make the “moral” choice, telling the Commons disabled people are “frightened” as he urged the PM to introduce a wealth tax instead of “making the poor and vulnerable pay”.
Sir Keir pledged to “protect those who need protecting”, but later added there is no “bottomless pit”.
He said the Tories “left a broken welfare system, which locks millions out of work, that is indefensible in my view, economically and morally”.
Image: Sir Keir Starmer was asked about the welfare cuts at PMQs
Another Labour MP, John Slinger, urged the PM to reassure the Commons he will “provide compassion to those who can’t work”.
Labour MP Nadia Whittome told the BBC the government should impose a wealth tax instead of “placing that burden on disabled people who have already borne the brunt of 14 years of austerity”.
She added that she “can’t look her mum in the eye and support this”.