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The Labour party conference passed without as much as a whimper this week, with fairly unexciting speeches from Rachel Reeves and Sir Kier Starmer. The most exciting part was Unite’s General Secretary Sharon Graham bringing a much-anticipated conference vote on the proposed axing of the winter fuel payment. Unsurprisingly, the result was a resounding vote to not remove this benefit which dealt a blow to the Prime Minister the day after he delivered his conference speech and subsequently departed to speak at the United Nations General Assembly. Whilst this vote was evidently not binding, it is not the way the new Prime Minister would have wished the conference to end. Whilst Labour evidently waited until the last possible moment for the vote to happen, is does leave a sour taste.
One ray of sunshine that I noted, was Rachel Reeves subtle hint that she may reconsider the interpretation of the UK’s fiscal rules to allow more borrowing and, just maybe, open the way for less tax rises in the 30th October Budget.
Since the 1990s, UK governments have set constraints on how much they can borrow to fund public spending net of tax revenues, as well as total public debt relative to GDP. These targets are required by legislation but have been frequently adjusted in response to changing circumstances or priorities. These are the “Fiscal Rules.”
A fiscal rule is simply a limit or restriction adopted by governments to constrain their decisions around taxes and public spending. The rules have generally been self-imposed, and they typically apply to a measure of the fiscal deficit (the gap between public expenditure and tax revenues in a given year), the public debt (the total amount borrowed to finance past deficits) or public spending relative to GDP. The UK Governments Debt-to-GDP ratio rose to 100% last month.
Governments in the UK have used fiscal rules to guide policy since 1997. During that time, public debt relative to GDP has risen materially as a consequence of major economic shocks. Commentators have become increasingly concerned that the rules have created incentives for poor policy-making (that is, chancellors have focused on meeting the rules rather than simply considering the spirit of their fiscal rules.
Perhaps the most important recent evolution in this set-up was the creation of the Office for Budget Responsibility (OBR) in 2010, which removed from the Treasury its ultimate control over the forecasts that underpin fiscal policy. As a result, fiscal rules should be seen as an expression of a government’s objectives, not something that dictates those objectives.
Further, it is relatively simple for a government in the UK to change its fiscal rules – a feature of increasing concern in recent years as fiscal rules have been changed more frequently by the chancellor of the day. It was therefore very interesting to hear Chancellor of the Exchequer Rachel Reeves signalling this week that she supported alternative approaches to measuring the national debt that would allow more infrastructure spending.
Reeves told delegates on Monday: “It is time the Treasury moved on from just counting the costs of investment in our economy to recognising the benefits, too.” We are told that sources confirmed she could change the way the government’s five-year debt rule is assessed to allow more spending on housing, roads, and hospitals. The UK's current fiscal rules state that the debt-to-GDP ratio should be falling within a five-year horizon and the ratio of the annual budget deficit to GDP should be below 3% by the end of the same period.
Important changes to the way the Fiscal Rules are interpreted could include excluding losses for the Treasury on the Bank of England winding down its crisis-era quantitative easing bond-buying programme, which experts say could open up headroom in the public finances’ worth up to £15bn. It could also include moving Labour’s new investment institutions, the National Wealth Fund and GB Energy, off the government’s books.
Whilst we may have a vested interest in this news as we consider the impact of the Budget on our clients, maybe, just maybe, the rays of light are starting to shine through the gloom. Have a good weekend.
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