Rachel Reeves won't break her fiscal rules, she'll destroy them

Telegraph

a day ago

For those not paying attention, this Labour Government is turning deception into a fine art. The technique is simple enough: make a pledge that seemingly provides reassurance, then drive a Challenger tank through the pretence, while claiming the literal promise has been maintained.
The obvious example is Labour's pledge not to raise the taxes of working people. From the Prime Minister, Sir Keir Starmer, to the Chancellor, Rachel Reeves, on to the Chief Secretary to the Treasury, Darren Jones, and any Labour minister being grilled in an interview, the mantra is repeated. Income tax, employee National Insurance contributions and VAT have not been increased – so there have been no taxes raised on working people.
The undeniable fact that increases in employers' National Insurance contributions and other taxes result in costs being borne by working people causes no shame, no embarrassment and no admission of a promise being broken.
The next big promise to be broken but not betrayed is that the tax and spend plans of Reeves will stay within the fiscal rules she has set herself. By this, the Chancellor means that a responsible government matches its day-to-day spending with its income and only borrows to invest.
The latest public borrowing figures have taken a howitzer to this pretence, effectively blowing it out of the water. The deficit for June was £6.6bn higher than the same month last year, while the gap has grown by £7.5bn when you compare this financial year to the previous – and we're only three months in. Andrew Sentance, a former Bank of England economic adviser who served on its Monetary Policy Committee for five years, suggests the 'deficit for 2025/26 [is] heading for £170bn, 5.5-6pc of GDP, even higher than last year – totally unsustainable and over £50bn above the OBR forecast'.
Unfortunately for the Government, the many tax rises Reeves announced in her Budget of October 2024 accelerated behavioural responses in the British public to avoid tax increases. The result has been – at best – erratic economic growth, unpredictable tax revenues and a rise in borrowing to meet its everyday commitments. In reality, Reeves is borrowing now to pay for past borrowing and Labour's additional spending that we cannot afford.
That is why even the dogs in the street are barking loudly about higher taxes being necessary for her next Budget to stay within the fiscal rules.
Were Reeves to abandon her talk of supposed prudence, there would likely be a market response akin to her experiencing skydiving without a parachute.
What can the Chancellor do to avoid such a fate? This was signalled in March 2024, when in her Mais Lecture, she revealed an approach to debt financing that would augur greater use of the EU's style of borrowing that, like old Private Finance Initiative (PFI) schemes, could be used to 'invest' in net zero and other politically driven infrastructure. It will keep some beneficiaries in the private sector happy while allowing Labour to claim it is making investments for our future without driving up the debt burden.
Bob Lyddon, an international banking and finance consultant, explained her cunning plan in his paper Decoding Rachel Reeves and remains convinced that while tax rises to meet everyday funding will undoubtedly be necessary, the Chancellor will attempt to balance her bromides with honeyed announcements of grand schemes that promise much but deliver little.
Reeves signalled how a small amount of 'borrowing for investment' by the Government could be multiplied by having intermediate public entities (like Great British Energy and the National Wealth Fund) borrow as well, and by the resultant schemes also borrowing, this time from investment companies like BlackRock and UK pension schemes. The result will be an Enron-style debt mountain costing 10pc per annum plus the repayments, all falling on the hapless UK business and personal taxpayers one way or another.
It is an EU 'bait and switch' that grows off-balance sheet debt that eventually crystallises and has to be paid, just like off-balance sheet PFI still has to be paid. This vision is consistent with Labour's ambition of realignment with the EU and will result in the UK experiencing the same sub-optimal levels of economic growth.
It allows Labour to say it is meeting its commitments to splurge great dollops of money into our economy without us feeling the hit. The price would be paid over a 50-year-long commitment that will not immediately result in higher taxes but will drive up the running costs of the public sector.
We should be afraid. When Reeves talked up the supposedly halcyon days of Gordon Brown's grandiose public borrowing and especially his use of PFI 'investment' she ignored how it still costs us billions to repay today. The total PFI payments from 1996/97 up to the final transaction not due until 2052/53 are £278.3bn – representing an astonishing 555pc of the £50.1bn capital sum.
Of the total of 669 PFI contracts, 588 were under Labour's Blair and Brown governments. An estimate by the Left-leaning Institute of Public Policy Research (IPPR) priced £13bn of Labour's 1998 PFI-funded NHS capital investment to have a cost of £80bn, and by 2019, it still had £55bn to pay.
My money's on Lyddon being right, meaning Labour's next big political double-cross will be to say its fiscal rules are being met when she's driving that tank right over them. While she distracts us with carefully composed doublespeak about the need to increase taxes (because Reeves knows no other way to make her numbers add up and will not be allowed to cut spending), hidden borrowing will be conjured up, too.
Ultimately, that will mean yet further tax rises for our grandchildren and their children too. Whether or not our economy or our people can bear it, we shall never know – for none of us are likely to be around to see the carnage.