Chancellor Rachel Reeves will present her first budget at the end of October, giving her the first chance to change fiscal rules.
When it came into government in July, the government said the Conservatives had left it with a £22 billion black hole, so the Chancellor is expected to use the October 30 budget to raise some of that amount.
Ms. Reeves said in November, when asked whether she would consider changing the debt target, “I'm not going to manipulate the data or do anything to get different results.”
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But it is being urged to change the rules to give the government access to £57 billion, according to a think tank from the Institute for Public Policy Research (IPPR).
And during Prime Minister's Questions on October 9, Sir Keir Starmer refused to say whether he agreed with the Chancellor's November statement, which led some to speculate that the government might change fiscal rules.
Sky News looks at what the fiscal rule is, what the Labor government's policies are and how they might change.
What are fiscal rules?
A fiscal rule is a limit or restriction put in place by governments to limit the amount they can borrow to finance public spending.
These may be set by an independent body, but since 1997 UK governments have set their own limits.
The rules concern the budget deficit – the difference between government spending and tax revenues during a year – the public debt – the total amount borrowed to finance past deficits – or public spending relative to GDP.
In 2010, the Office of Budget Responsibility (OBR) was created to remove final control over the forecasts that form the basis of fiscal policy from the Treasury.
The Economic Observatory said the creation of the OBR meant that fiscal rules should be seen as “an expression of government objectives, rather than something that imposes those objectives”.
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What are the current fiscal rules?
The Labor Party's manifesto outlined the new government's fiscal rules, describing them as “non-negotiable”. These are:
1) The current budget must be balanced so that current costs match revenues
2) Debt must fall as a percentage of GDP by the fifth year of the forecast – this has been carried forward by the Conservative government.
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Will Rachel Reeves keep her budget promise?
How could fiscal rules change?
No changes to the rules themselves are expected.
However, the Chancellor could change the way debt is calculated, which could in turn change the UK's official debt levels and give Ms Reeves the opportunity to borrow more.
Ms Reeves told the Labor conference “investment loans” were the only likely solution to the UK's productivity crisis.
By changing the definition of debt, it could find additional resources of up to £50 billion.
However, the Institute for Fiscal Studies (IFS) has warned against borrowing so much money.
Paul Johnson, director of the IFS, said Labour's pledge not to increase income tax, national insurance or VAT, combined with a promise to balance the current budget, means it will not be able to free up additional resources for day-to-day spending.
The Governor of the Bank of England, Andrew Bailey, introduced quantitative tightening in 2022
Quantitative easing
The idea that the Chancellor is considering is to exclude annual losses of £20-50 billion incurred by the Bank of England in connection with the winding down of its bond purchase program under quantitative easing (QE).
Since the 2008 financial crisis, the Bank of England has repeatedly used QE to stimulate the economy and achieve its 2% inflation target, creating £875 billion of new money over 13 years.
During QE, the Bank buys bonds (a debt security issued by the government) to raise their price and lower long-term interest rates on savings and loans.
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From November 2022, the Bank is conducting quantitative tightening by not purchasing other bonds on the maturity date of the bonds held or by actively selling bonds to investors or a combination of both methods.
The aim is not to influence interest rates or inflation, but to ensure that QE can be introduced again in the future if necessary.
In February, the cross-party Treasury Committee raised concerns that quantitative tightening could result in losses of between £50 billion and £130 billion and said it could have “enormous consequences” for public spending over the next decade.
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What will the budget include?
Rule out new institutions
There are suggestions the Chancellor could move GB Energy and the National Wealth Fund, both set up by Labour, off the Government's books.
Andy King, a former senior official at the OBR, estimates this could unlock a further £15 billion in borrowing.
Exclude projects
Another option would be to exclude certain projects from the debt calculation.
Government officials said they were working on a plan to publish estimates of how much new capital projects could spur economic growth and how much money they would generate directly for the state treasury.
