Reeves plans to ‘fiddle’ fiscal rules to boost borrowing, claim Tories

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Chancellor Rachel Reeves has been accused by the Conservatives of paving the way to “fiddle the fiscal rules” to give her scope for borrowing billions in next month’s Budget.

Shadow chancellor Jeremy Hunt claimed on Wednesday that Reeves wants to leave her hands free to announce a change to the way public debt is measured in her October 30 Budget, giving her more leeway to borrow.

City analysts estimate that redefining public debt to exclude BoE bond portfolio losses would triple the government’s headroom to borrow, up from around £9bn that existed in March.

Hunt said Reeves was “planning to fiddle the fiscal rules, leading to a massive increasing in borrowing and debt with hard working taxpayers left to pick up the tab”.

The Treasury left open the possibility that Reeves could redefine public debt. “The precise details of the government’s fiscal rules will be set out at the Budget on October 30, alongside an OBR forecast,” it said.

The skirmishes came as the government pushed through the Commons its Budget Responsibility Bill, an attempt by Reeves to prove she is committed to fiscal discipline.

The bill will require in law that the OBR carries out an assessment on any large scale announcement of tax and spending, in an attempt to prevent a repeat of Liz Truss’s disastrous “mini” Budget” in 2022 where the fiscal watchdog was sidelined.

Labour MPs on Wednesday rejected a Conservative attempt to amend the bill to include a duty on the independent Office for Budget Responsibility to compile a report on the impact of any change to the fiscal rules.

Tory MPs argued that changing the detailed operation of the fiscal rules would have a significant impact on the public finances and should also be subject to an OBR report.

The Treasury said the Conservative amendment making that change was “unnecessary”, adding: “Robust fiscal rules support stability but do not in themselves change tax and spending.” The government defeated the Tory amendment by 366 votes to 109.

Reeves has set herself two fiscal rules that will be monitored by the OBR: a requirement that the current budget, which excludes investment, moves into balance; and a requirement that debt falls as a share of the economy by the fifth year of the forecast.

But she has yet to fully flesh out the details of either of those rules — decisions that will be enormously important to the room for budgetary manoeuvre she enjoys in October. It is not yet clear, for example, over what time period the current budget will need to move into balance.

Crucially, Labour has not yet set out the definition of public debt that it will use in its second rule. Under their rules, the Conservatives targeted public sector net debt excluding the Bank of England’s debt, or underlying net debt.

Swapping that for an alternative gauge would boost the amount of budgetary “headroom” the chancellor has on the table on October 30.

This is because of the differing ways in which the Bank of England’s efforts to unwind quantitative easing are accounted for in various debt measures.

The QE programme swelled government receipts as interest payments on its bond holdings flowed back to the Treasury. But the central bank is now selling bonds back to investors at a loss, which is impacting the underlying measure of public debt targeted by the Tories.