Money blog: UK economy could 'crumble' if chancellor changes rules (2025)

Rachel Reeves's plan to change the government's fiscal rules on borrowing could have "frightening long-term consequences", leading financial advisers at Blick Rothenberg have said.

Tweaking how the UK's debt is defined could give the chancellor another £50bn to play with at next week's budget - see our previous posts for details.

But...

"Increased borrowing and increased borrowing costs would have to be paid back by all taxpayers over time and with interest," said Nick Winters, a partner at Blick Rothenberg.

"At some point, she would need to raise taxes even further or risk widening the fiscal £22bn 'black hole', which given the tax rises already proposed in the budget, is a scary possibility."

Mr Winters said the change could present her with a "big, temporary win" - but "there are only so many tweaks our economy can take before it crumbles".

(This is an abridged version of Conway's original analysis from earlier this month - read the full thing here)

I want you to ponder the fiscal rules Rachel Reeves is confronted with at this, her first budget. Most pressingly, ponder the so-called debt rule, which insists that the chancellor must have the national debt - well, technically it's "public sector net debt excluding Bank of England interventions" - falling within five years.

There is, it's worth underlining at this point, nothing fundamental about this rule. Reeves inherited it from the Conservative Party, who only dreamed it up a few years ago, after COVID.

To meet this rule, she needs the national debt to be falling between the fourth and fifth year of the OBR's five-year forecast. And according to the last OBR forecasts, which date back to Jeremy Hunt's last budget, it is. But not by much: only by £8.9bn.

If that number rings a bell, it is because this is the much-vaunted, but not much understood, "headroom" figure a lot of people in Westminster like to drone on about.

And - if you're taking these rules very literally, which everyone in Westminster seems to be doing - then the takeaway is that the chancellor really doesn't have much room left to spend in the coming budget. She only has £8.9bn extra leeway to borrow!

The first thing to say is there's nothing gospel about these rules. There's no tablet of stone that says the national debt needs to be falling in five years' time.

Second, sometimes investments in things can actually generate more money than they cost. But since the debt rule only looks five years into the future, you only ever see the cost and not the eventual breakeven point.

Third, the debt rule used by this government actually focuses on a measure of the national debt which might not necessarily be the right one.

The measure we currently use excludes the Bank of England, which seemed, a few years ago, to be a sensible thing to do. The Bank has been engaged in a policy called quantitative easing which involves buying and selling lots of government debt - which distorts the national debt. Perhaps it's best to exclude it.

Except that recently those Bank of England interventions have actually been serving to drive up losses for the state. I won't go into it in depth here for risk of causing a headache, but the upshot is most economists think focusing on a debt measure which is mostly being affected right now not by government decisions but by the central bank reversing a monetary policy exercise seems pretty perverse.

In other words, there's a very strong argument that instead of focusing on the ex-BoE measure of net debt, the fiscal rules should instead be focusing on the overall measure of net debt. And here's the thing: when you look at that measure of net debt, lo and behold it's falling more between year four and five. In other words, there's considerably more headroom: just under £25bn rather than just under £9bn based on that other Bank-excluding measure of debt.

Might Reeves declare, at the budget or in the run-up, that it makes far more sense to focus on overall PSND from now on? Quite plausibly. And while in one respect it's a fiddle, in her defence it's a fiddle from one silly rule to an ever so slightly less silly rule.

It would also mean she has more room to borrow to invest - if that's what she chooses to do. But it doesn't resolve the deeper issue: that both of these measures fixate on the short-term cost of debt without taking into account the long-term benefits of investment.

If Reeves is determined to stick to the, some would say arbitrary, five-year deadline to get debt falling but wants to incorporate some measure of the benefits of investment, she could always choose one of two other measures for this rule.

She could focus on something called "public sector net financial liabilities" or "public sector net worth". Both of these measures include some of the assets owned by the state as well as its debts - the upshot being that hopefully they reflect a little more of the benefits of investing more money.

The problem with these measures is they are subject to quite a lot of revision when, say, accountants change their opinion about the value of the national road or rail network. So some would argue these measures are prone to more volatility and fiddling than simple net debt.

Even so, these measures would dramatically transform the "headroom" picture. All of a sudden, Reeves would have over £60bn of headroom to play with. More than enough to splurge on loads of investments without breaking her fiscal rule.

There's one other change to the rule that would probably make more sense than any of the above: changing that five-year deadline to a 10 or even 15-year deadline. At that kind of horizon, a pound spent on a decent investment would suddenly look net positive for the economy rather than a drain.

Rachel Reeves will rewrite the government's fiscal rules in next week's budget to allow her to increase borrowing for public investment by around £50bn.

Speaking to Sky News in Washington DC, the chancellor said that the self-imposed ruleunder which borrowing must be falling by the fifth year of economic forecasts will be redefined from the current measure of public sector net debt.

Ms Reeveswould not be drawn on what measure will replace the current rule but there is speculation that she will favour using public sector debt net of financial liabilities (PSNFL).

Under this definition, investments such as the government's student loans book are defined as assets rather than liabilities, which on current measures would allow a further £53bn of borrowing.

The chancellor said the second fiscal rule, under which day-to-day spending must be funded from government revenue rather than borrowing, would be unchanged.

Growing consensus

Ms Reeves cited support for increasing the debt threshold from leading British economists, as well as the International Monetary Fund, which this week said public investment should be protected and was "badly needed" in the UK.

She insisted the change was necessary to end years of declining public investment and deliver on Labour'spromise to deliver growth.

"Under the plans that I have inherited from the previous Conservative government, public sector net investment as a share of our economy was due to decline steeply during the course of this parliament," she said.

"I don't want that path for Britain when there are so many opportunities in industries from life sciences to carbon capture, storage and clean energy to AI and technology, as well as the need to repair our crumbling schools and hospitals."

Ms Reeves denied that she was effectively fiddling the rules to get around her manifesto pledge not to increase income tax, VAT or national insurance.

"The rule that really bites is the first rule, the stability rule, to get day-to-day spending funded by tax receipts. That's something that the previous government weren't even trying to achieve and we will show in the budget next week how we will deliver on that promise.

"The second role is about being responsible. By seizing the opportunities, but doing it in a way where we are making sure we're getting value for money for every pound of taxpayers' money spent.

"Of course we'll put guardrails in place to ensure that every pound of taxpayers' money that is spent is spent wisely, and will involve the National Audit Office and the Office of Budget Responsibility in that."

The first test of the change in the debt rule will be the reaction of bond markets, which rose slightly on Thursday following reports of Ms Reeves's plans.

Taken together, the redefined fiscal rules set the terms of a budget that is likely to see tax rises and public spending cuts balanced by more freedom to borrow.

Tax rises not ruled out

Ms Reeves did not rule out a raft of tax rises, including adding national insurance to employers' pension contributions, from which public sector employers may be exempt.

"I was clear in the statement I made to the House of Commons in July that there will be difficult decisions in this budget around spending, welfare and taxation. But the precise details I will set out to the House of Commons next week.

"I will be a responsible chancellor. I will be honest and transparent about the challenges we face, but also how we'll fix them to wipe the slate clean after the mismanagement we've seen in the last few years under the Conservatives."

Gareth Davies, shadow exchequer secretary, said: "Before the election Rachel Reeves promised that she would not 'fiddle' the fiscal rules, and now it seems she is going to do exactly that. Remarkably she is announcing this not to Parliament, but to the IMF in advance of the budget.

"This is already having real world effects, with borrowing costs rising. This uncertainty over additional borrowing risks interest rates staying higher and for longer. It's families up and down the country who would pay the price."

The NHS offers a free jab every year to people at higher risk of getting seriously ill from flu.

If you're eligible, you may be able to get a flu vaccine from a pharmacy, your GP surgery, your care home, your maternity service or your employer (if you're a frontline health or social care worker).

You can get the free NHS flu vaccine if you:

• Are aged 65 or over in England, Wales and Northern Ireland
• Are aged 50 or over in Scotland
• Are pregnant
• Live in a care home
• Are the main carer for an older or disabled person, or receive carer's allowance
• Live with someone who has a weakened immune system
• Are a frontline health and social care worker
• Are of school-age (reception to year 11)
• Have certain medical conditions (the NHS has afull list)

Most eligible adults will be able to get the flu vaccine from 3 October.

If you don't qualify for a free flu jab on the NHS or at work, you'll have to pay, with prices from around £10-22 if bought from major supermarkets and pharmacies.

By Katie Spencer, arts and entertainment correspondent

Without urgent intervention the UK looks set to see "the end of a clubbingera that has defined generations", according to industry experts.

Ahead of next week's budget, Michael Kill, the chief executive of the Nighttime Industries Association (NTIA), has spoken to Sky News about the urgent need for government support to protect a "vital part of the UK's social fabric".

"We are witnessing the systematic dismantling of the nighttime economy. Our industry is not just about entertainment; it's about identity, community, and the economy," he said.

New research by the NTIA shows that in the past four years the UK has lost 37% of its clubs, which works out at about 10 clubs closing each month.

Not only has the cost of living meant more of us are going out less, the nighttime industries have had to grapple with rising operational costs, with one recent NTIA flash poll of 500 businesses finding that seven out of 10 are either barely breaking even or operating at a loss.

The NTIA says things are so bleak that if the rate of closures continues then on 31 December 2029 we will have no more clubs in the UK.

Read on here...

By Sarah Taaffe-Maguire, business reporter

Today we're learning how the companies we give a good bit of our money to are faring.

Unilever and Barclays are two of the biggest risers in the benchmark UK stock market index, the FTSE 100 list of most valuable companies on the London Stock Exchange, with both seeing share price rises of more than 3%.

Unilever, the company behind Ben & Jerry's, Dove and Hellman's, reported slightly better-than-expected sales in the third quarter of this year thanks to product innovation and the slowing of price increases.

High interest rates have meant Barclays expects customers to pay more for borrowing, and for more money to come into the bank as a result.

Both consumer and corporate banking performed well across the third three months of its financial year.

Overall, the index is up 0.63% and the larger, more UK-based, company-focused FTSE 250 rose 0.18%.

The pound has stayed below the $1.30 mark since yesterday. Against the euro, however, it's maintained a €1.20 high.

The government should charge drivers 1p per mile instead of raising fuel duty, the Tony Blair Institute has urged.

The proposal would raise the same amount of cash for the Treasury - £3.3bn - and head off a decline in fuel duty revenue as road users turn to electric vehicles, the institute said.

Chancellor Rachel Reeves could be considering restoring fuel duty in the budget next Wednesday after Rishi Sunak cut it by 5p in 2022.

"The chancellor would raise the same revenue as the planned fuel-duty hike and the average motorist would be no worse off," the institute said in a report.

Under its plans, cars and vans would incur a 1p-per-mile charge, rising to between 2.5p and 4p for heavy-goods vehicles.

The charge would be verified and paid during mileage checks at MOTs.

If introduced, the system should evolve from a flat rate to a targeted one, changing prices during off-peak driving times to ease congestion, the report said.

The Tony Blair Institute believes the proposal would raise almost £10bn a year in taxes by the end of the next parliament.

The former prime minister explored the idea in 2007 but abandoned it due to opposition from motorists.

The budget is less than a week away and we've been told it will be painful as the government seeks to fill a £22bn "black hole" it says was left by the Tories - but what might that mean in practice?

We've taken a comprehensive look at which taxes could rise here - though of course it's mainly speculation and clues offered by ministers at this stage:

Andrew Bailey has told an audience in Washington that inflation is falling faster than he and his colleagues at the Bank of England expected.

Coming a fortnight before the governor convenes the Bank's monetary policy committee, andrepeated twice in a 30-minute Q&A, it begged an obvious follow-up that never came: will the same apply to interest rates?

The governor was not asked directly, but he included enough caveats to suggest that the gradual but steady reduction priced in by markets, starting with a quarter-point trim in November, remains more likely than a precipitous fall kicked off by a half-point slash.

It could be, he said, that the recent dip below the Bank's 2% target is more a function of so-called base effects - the ebb and flow of energy prices in the annual data - than a fundamental return to normal.

Mr Bailey's principal reservation about declaring the battle against inflation definitively won is the labour market.

The UK's jobs data is poor and the governor is concerned that what looks like an easing market, in which it is easier and cheaper to hire, does not tell the whole story.

He highlighted concerns that post-pandemic the make-up of the labour force may have changed for good, which would embed inflation for longer.

"Disinflation has taken place faster than we thought," he told the Institute of International Finance.

"It is grinding down but the question is whether there is a structural change that makes it more sticky?"

Mr Bailey's aim in these public appearances is to think out loud about what the Bank is considering without revealing his conclusion.

Sky News' job is to be a little more direct, so we asked him. The response: "We'll see."

Vintage fashion is big business. And reselling sites like Vinted or Depop have made it easier than ever to find what you want - no more snooping through charity shops and car boots, instead everything is readily available on the internet.

Sky News' series New Money takes a look inside new digital industries, speaking to some of the influencers, content creators and business owners who have turned their hobbies into full-time jobs.

In this episode, we spend the day with the founder of fashion label Timeless Wear, who sell vintage pre-loved 2000s clothes.

Amber Ramon started the business on Depop - and has now sold items to celebrities like Bella Hadid. She tells Sky News how she developed her business, and how the cost of living crisis has affected the fashion industry.

By Brad Young, live news reporter

January and February are often the cheapest times of year to go on holiday, according to the Association of British Travel Agents.

Lower demand results in cheaper plane tickets and hotel bookings, whether that means escaping the British wintertime for sunnier places or embracing the ski season abroad.

And with energy costs remaining high, spending time away from home when you would usually be paying to heat it can make more financial sense than travelling in the summer.

Sky News has spoken with travel experts Sean Tipton, from ABTA, and David Child, from Thomas Cook, about what locations holidaymakers can get value for money.

Both experts recommended Spain, with Malaga's 17C winter an "ideal time to go away", according to Mr Tipton.

"It's actually a very sensible time to go and it is cheap," he says, "with the added benefit of escaping the most depressing time of the year".

Alternatively, Costa Brava can be a third less than Majorca or the Canary Islands, Mr Child adds.

"The cliché destination for winter sun at that time of year is the Canary Islands - it's actually their peak months," Mr Tipton says.

But if you are going to head to the islands, try La Gomera, which is less popular, less expensive and great for nature lovers, he recommends.

North African countries like Egypt, Tunisia and Morocco can also provide some affordable respite for sun lovers, Mr Child says.

He recommended the city of Agadir in Morocco as "especially good value" because it's less well known than Marrakesh, while offering a coastline and some "really good beach resorts" around Taghazout.

"There are places where you can get really cheap holidays in the winter that are popular in the summer, so they've got all the infrastructure - the restaurants and the bars, great hotels.

"If the money you're saving on the heating bills at home offsets the cost of the holiday, then even better."

Skiing

If you're not fussed about soaking up the rays, Mr Tipton says northern Spain is "a bit of an undiscovered secret for British holidaymakers".

"It offers very good value compared to the more traditional resorts in France and Switzerland."

Skiers should also look into Bulgaria "if you've got young kids who haven't been skiing before".

Andorra is "good value" and eastern European countries, such as Poland, also have "very good ski resorts".

Further afield

"We're also seeing people heading further afield - long haul places that are perhaps a bit cheaper when you get there," Mr Child says.

Bali, Sri Lanka, South Africa and Goa in southern India are places he thinks the pound will go further.

Mr Tipton says: "I'd strongly recommend South Africa. Again, the flights are not going to be that cheap, but it's incredibly good value once you get there."