Budget 2024 and Beyond: Exploring Labour’s Fiscal Strategies and Potential Changes Under Chancellor Reeves

Budget 2024: What fiscal policies does Labour adhere to, and is Rachel Reeves likely to modify them for increased revenue?

This fall, during her inaugural budget presentation, the chancellor indicated that her administration was facing a £22bn deficit due to the previous Conservative government's actions.

Political correspondent @alixculbertson

Sunday, October 13, 2024, 12:

Chancellor Rachel Reeves is set to present her inaugural budget at the end of October, marking her initial opportunity to modify the fiscal regulations.

When the government took office in July, it claimed that the Conservatives had left them a £22 billion deficit. Consequently, the chancellor is anticipated to address this shortfall in the upcoming budget set for October 30.

In November, when questioned about potentially altering the debt target, Ms. Reeves stated she would not manipulate the numbers or devise a scheme to achieve different outcomes.

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According to the Institute for Public Policy Research (IPPR), there are calls for her to modify the regulations to enable the government to utilize £57 billion.

In the session of Prime Minister's Questions on October 9, Sir Keir Starmer declined to confirm his agreement with the chancellor's statement from November, leading to speculation that there might be alterations to the fiscal policies by the government.

Sky News explores the definition of a fiscal rule, the regulations set by the Labour government, and potential modifications to these rules.

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Understanding Fiscal Regulations

A fiscal rule is a regulation set by governments to cap the amount of debt they can incur for public expenditures.

Since 1997, UK governments have chosen to establish their own limitations, though they could be determined by an independent agency.

Regulations govern the fiscal deficit, which is the difference between government spending and tax income over a year, the public debt, which accumulates as the total amount of funds borrowed to cover previous deficits, and government expenditures in relation to the GDP.

In 2010, the establishment of the Office for Budget Responsibility (OBR) aimed to strip the Treasury of its final say over the economic projections that form the basis of fiscal policy.

According to the Economics Observatory, the establishment of the OBR implies that fiscal rules are better understood as a reflection of a government's goals, rather than as directives that shape these goals.

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What are the existing financial regulations?

The manifesto of the Labour Party outlined the fiscal policies of the newly formed government, labeling them as "non-negotiable." These policies include:

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Rewritten text:

1) It is necessary for the existing budget to achieve equilibrium, ensuring that regular expenses are covered by income.

The rule stipulates that by the fifth year projected, debt should be decreasing relative to GDP, a policy inherited from the previous Conservative administration.

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What alterations could be made to the financial regulations?

There are no anticipated modifications to the regulations.

The chancellor might alter the method used to tally debt, potentially adjusting the UK's recognized debt level and providing Ms. Reeves with additional borrowing capacity.

At the Labour conference, Ms. Reeves stated that the only viable option to address the UK's productivity crisis is "borrowing for investment."

By altering her understanding of debt, she could potentially uncover an extra £50 billion in financial flexibility.

The Institute for Fiscal Studies (IFS) has cautioned against taking on such a high level of debt.

Paul Johnson, who heads the Institute for Fiscal Studies (IFS), stated that the commitments made by Labour to avoid hikes in income tax, national insurance, or VAT, along with their vow to maintain a balanced current budget, will prevent them from allocating more funds for regular expenditures.

Monetary Stimulus

It's reported that the chancellor is considering not counting the annual losses of £20 billion to £50 billion that the Bank of England is facing as it phases out its quantitative easing (QE) bond-purchase scheme.

Following the financial crisis in 2008, the Bank of England has consistently employed quantitative easing as a means to boost the economy and achieve a 2% inflation rate, generating a total of £875 billion in new money over the span of 13 years.

In a process known as quantitative easing (QE), the central bank purchases government-issued bonds to increase their prices and lower the long-term interest rates associated with savings and borrowing.

Discover more: Exploring how financial regulations hinder long-term investments – and Rachel Reeves' potential solutions. Eliminating national insurance may require multiple parliamentary terms.

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Since November 2022, the Bank has implemented a policy of quantitative tightening by either letting the bonds it holds expire without purchasing new ones, selling bonds directly to investors, or employing a mix of both strategies.

The goal is not to influence interest rates or inflation, but rather to maintain the ability to implement quantitative easing in the future, should it become necessary.

In February, the bipartisan Treasury committee highlighted the potential for quantitative tightening to result in financial losses ranging from £50 billion to £130 billion, noting that this could significantly impact government expenditure for the coming ten years.

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Omit recent establishments

Reports indicate that the Chancellor may consider transferring GB Energy and the National Wealth Fund, both established by the Labour Party, out of the government's accounts.

Andy King, who previously held a high-ranking position at the OBR, suggests that this move could allow for an additional £15 billion in borrowing capacity.

Omit projects

An alternative approach could involve omitting specific projects from the debt computation.

Authorities have announced that they are developing a strategy to release projections on the potential economic boost and revenue generation for the Treasury from new infrastructure investments.

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