Fiscal Rules

Statement

The following Statement was made in the House of Commons on Monday 28 October.

“With your permission, Madam Deputy Speaker, I would like to make a Statement to the House about the action the Chancellor will take this week to fix the foundations and rebuild Britain.

Economic growth and modern public services can only be built on strong foundations. That is why this Government have brought political and economic stability back to Britain. After years of chaos from the Conservative Party—chaos that cost families, businesses and public services dear—the British people are now rightly looking to this new Labour Government to clear up the mess from the last Government, fix the foundations and rebuild Britain. That is the change that my party promised the country, and it is the change that we will deliver.

To deliver that change, the fiscal rules that the Chancellor will set out this week will establish the basis for stable fiscal policy, meaning careful management of day-to-day spending and responsible long-term plans to invest and grow the economy.

As we committed to in our manifesto, the Government will have two robust fiscal rules that will guide the decisions we take. The first is our stability rule: we will pay for all day-to-day spending on public services from receipts. The budget was last in surplus under the last Labour Government, and this Labour Government will return the public finances to that position. The second is our investment rule, which will get debt falling as a proportion of our economy. It will ensure that we can secure the investment that our economy needs to grow, and to generate jobs and opportunities for people across the United Kingdom of Great Britain and Northern Ireland, while maintaining a strong fiscal anchor and ensuring that our debt burden falls over time.

The plans that we inherited from the last Government would have seen public sector investment decline to the lowest level in more than 10 years. The path of declining investment is the path of a declining nation, and we refuse to follow it. Instead, we will seize the huge opportunities of the future to support the enterprise and talent that this country creates.

The Government recognise that sustained public investment is a crucial driver of long-term economic growth, giving the private sector the confidence to invest too, but our ambitions for public sector investment must be balanced against the need to maintain debt on a sustainable trajectory and ensure that we invest every pound of taxpayers’ money responsibly. That is why I will deliver a 10-year national infrastructure strategy next spring, working with colleagues across government, the nations and regions, and with our mayors and the private sector, to set out a robust long-term strategy for sound investment. That is also why our new approach to overlapping multiyear spending reviews will improve the way that we allocate and spend capital, and why the Chancellor of the Duchy of Lancaster and I will lead the new national infrastructure and service transformation authority, which will drive better delivery of major projects and infrastructure across the country. In addition, there will be the work of the new office for value for money and the National Audit Office. Those robust guardrails will ensure that our capital spending is value for money, and that our financial investments deliver a positive return for the Exchequer.

Finally, the Chancellor has been listening to the views of institutions such as the International Monetary Fund and to expert economists. As she has set out, that is why the Treasury has been reviewing the right measure of debt to target in the fiscal rules ahead of the upcoming Budget. The details of that policy will be announced to the House in the Chancellor’s Statement on Wednesday, alongside an economic and fiscal forecast produced by the independent Office for Budget Responsibility. In the usual way, the fiscal rules will be published in a draft charter for budget responsibility, on which Members will vote in due course. I commend this Statement to the House”.

16:36:00

My Lords, over the next 24 hours the Chancellor is likely to break promises that she made to the British people in the run-up to the election, and I am in no doubt that that was always going to be the plan. This is why the Treasury team magicked up a fictional black hole—a black hole which, rather incredulously, contains spending decisions made by the current Government. This fictional black hole will be invoked once again at the Budget Statement tomorrow, to act as a fig leaf to cover tax rises which will put more juice into the phrase “taxing people until the pips squeak”. It is an audacious strategy, given its utter predictability, but my concern is for the people and businesses across the country who are just trying to get by and who will bear the brunt of Labour’s tax plans. Tax rises are only part of the plan. The second part of the Chancellor’s plan is to increase borrowing—but how could she, given the fiscal rules? These are the fiscal rules that the Chancellor explicitly said she would not change. She stated that she would not “fiddle the figures” to get different debt figures. She confirmed that an incoming Labour Government “will use the same models the government uses”. Now the Chancellor has performed a screeching U-turn and broken her promise not to—in her words—fiddle the figures. The Chancellor has announced a £50 billion change to the UK’s fiscal rules; she announced this important change at a conference in the United States, not to Parliament. Can the Minister confirm that the announcement at a conference in the United States was made in haste to reassure the bond markets? More worryingly, the country currently has new fiscal rules but no knowledge of what they actually are, because the Chancellor has failed to outline any details of what that new rule change involves. She also chose to make this announcement without an accompanying OBR report. I am sure the noble Lord, Lord Livermore, will remember that the very first Act passed under this Labour Government was one which gave more power to the OBR to scrutinise the Government’s actions. Does he agree that these actions with respect to the fiscal rules do not abide by the spirit of what was in that first Act passed under this Government? We are left in a situation in which the UK does not have an operational definition of public debt. Can the Minister explain what definition of public debt the Government are currently providing to lenders? There is a debate to be had about whether these changes to the fiscal rules make things better or worse, but what is absolutely clear is that fiddling with the debt rule does not magic up free money. Indeed, the independent Institute for Fiscal Studies has specifically warned that changing the UK’s debt rule to allow for higher borrowing is not free money. The IFS has cautioned that the Government’s new fiscal rule will cease to be a constraint on borrowing. Can the Minister explain how much new borrowing the Government intend to take on under these new rules, and how much the annual interest cost of that debt will be? I have no doubt at all that this is all part of a plan dreamt up long before the general election, and the next episode in this sorry tale is to be released tomorrow.

My Lords, we on these Benches have long called for vital investment into infrastructure, not least to fix our crumbling hospitals and schools, to tackle the failings and gaps in our transport system, and to deliver the affordable housing needed by so many. Infrastructure investment, including private investment, must be scaled up to drive sustainable economic growth across the nation, including the green energy revolution. But fiscal responsibility remains crucial. These Benches have argued before for the use of the public sector net fiscal liabilities as the appropriate measure to sit behind a borrowing rule, because it allows productive investment to be considered separately from day-to-day spending. I tried without success to persuade the noble Lord, Lord O’Neill of Gatley, to look more closely at this issue during the Conservative Government. Changing the measure also means reshaping the borrowing rule and the guard-rails to make them appropriate to that new measure. This Statement so far offers only the vaguest language, so I hope very much that we will hear a proper discussion of the rules and the guard-rails tomorrow in the Budget. Will the draft charter for budget responsibility, which I understand should contain much of that, be among tomorrow’s documents? There also seem to be a number of referees to oversee the rule and its implications, from the OBR to the national infrastructure and service transformation authority, an office for value for money and the NAO. How does this fit together and what oversight will be before Parliament? We cannot have a repeat of the Truss mini-Budget, which nearly wrecked the public finances with £40 billion in unfunded tax cuts. Does the Minister agree that the Budget must be credible to the markets, the interest burden on our public finances must be tackled and, at the same time, we must make good our infrastructure deficit—investing to fix hospitals and schools but also driving economic growth? None of it is easy, but all of it is necessary.

My Lords, I am very grateful to the noble Baronesses, Lady Vere of Norbiton and Lady Kramer, for their comments and questions. Let me start by setting out the context in which our fiscal rules will be set. The Budget that my right honourable friend the Chancellor will present tomorrow will be driven by this Government’s number one mission: to deliver sustainable growth after a decade and a half of stagnation. That growth can only be built on stable foundations, so the first and most important task in the Budget will be to turn the page on 14 years of instability and uncertainty, which have deterred investment and undermined business confidence. I agree with the noble Baroness, Lady Kramer, about the importance of fiscal responsibility—that is why the fiscal rules are so important. They will set the basis for stable fiscal policy, prudent management of day-to-day spending and responsible investment for growth. That commitment to responsibility and stability requires us to address in tomorrow’s Budget three challenges. First, there is the £22 billion black hole in the public finances that the noble Baronesses, Lady Vere, helpfully reminded the House about, which we inherited from the previous Government, and the vast majority of which will persist into future years. Secondly, the compensation payments for those who have suffered because of the infected blood and Horizon scandals were announced by the previous Government but never budgeted for. Thirdly, the state of the UK’s public services means that they cannot survive a return to the austerity that has done so much damage over the past 14 years, including by holding back growth. The noble Baroness, Lady Vere, mentioned our manifesto commitments. Our manifesto set out in our fiscal rules that “the current budget must move into balance, so that day-to-day costs are met by revenues and debt must be falling as a share of the economy by the fifth year of the forecast”. Our manifesto also said: “These rules allow for prudent investment in our economy. This represents a clear break from the Conservatives who have created an incentive to cut investment; a short-term approach that ignores the importance of growing the economy”. To deliver on these manifesto commitments, the Government’s fiscal rules will do two things. First, and most importantly, the stability rule will mean that day-to-day spending will be matched by revenues, as committed to in our manifesto. We will meet this rule within this Parliament. Given the state of the public finances and the need to invest in our public services, this rule will bite hardest. Alongside tough decisions on spending and welfare, the Chancellor has been clear that this means that taxes will need to rise in tomorrow’s Budget to ensure that this rule is met. The Government’s second fiscal rule—the investment rule—will deliver on our manifesto commitment to get debt falling as a proportion of our economy. That will make space for the necessary increases in investment in the fabric of our nation, and it will ensure that we do not see the falls in public sector investment that were planned under the previous Government. The plans that we inherited would have seen public sector investment decline to the lowest level in over 10 years. The noble Baroness, Lady Vere, seemed to confirm that that would still be the Conservatives’ approach. That cannot be right. If we continue on this path of decline, we will continue to miss out on the opportunities of the future, and other countries will continue to seize them. To rebuild our country, we must increase investment, in partnership with the private sector. The UK lags behind every other G7 country on business investment as a share of our economy, and the IMF has been clear that weak investment and low productivity are holding back growth. We must create the conditions for the private sector to invest, by stabilising our economy and introducing reforms to planning and skills. At the recent International Investment Summit, we saw £63 billion of new private sector investment committed to our economy, creating nearly 38,000 new jobs. The Government must invest alongside business, through expert bodies like the new national wealth fund, multiplying the impact of public money. However, there is also a significant role for public investment. For too long, we have seen Conservative Chancellors cut public investment and raid capital budgets to plug gaps in day-to-day spending. The result of that approach is clear for all to see: hospitals without the equipment they need, our schools literally crumbling, sewage in our rivers and growth held back. We cannot continue on this path of decline. We need to invest more to grow our economy and seize the huge opportunities that exist in digital, tech, life sciences and clean energy. To do this—to grow our economy, free up more money, invest in capital and meet our manifesto commitment to remove the incentive to cut investment—the Chancellor has said that, in tomorrow’s Budget, we will change the Government’s measure of debt. As the noble Baroness, Lady Kramer, said, it is of course important that every pound of taxpayers’ money that is spent gets value for money and delivers returns for the taxpayer when we invest in capital projects. So we will put in place guard-rails with the National Audit Office and the Office for Budget Responsibility, enabling them to validate the investments we are making to ensure that we deliver value for money, and give markets confidence that there are rules around the investments we can make as a country. The Chancellor will set out the Government’s full fiscal plan, including the precise details of our fiscal rules, in tomorrow’s Budget, alongside an economic and fiscal forecast produced by the OBR—and the noble Baroness, Lady Vere, helpfully reminded us that the disastrous Liz Truss mini-Budget failed to commission one. In our Budget, we will turn the page on the past 14 years, fix the foundations of our economy and restore economic stability to our country. We will invest to rebuild Britain and begin a decade of national renewal.

16:48:00

My Lords, we used to have a rule of Budget purdah in this country for the very good reason that it prevented market speculation in the run-up to the House of Commons hearing the Budget details. Every Chancellor who followed me in office has steadily weakened that and, this year, we have had three months of absolutely absurd semi-debate, with hints, leaks and suggestions from the Government being debated. It began by ruling out any question of raising the four most basic taxes that everybody previously turned to when they needed more revenue, because they share the burden more fairly across the country. This has now accumulated with the Prime Minister deciding, two days before the Budget, that he will take for himself a popular announcement—to some of his Cabinet colleagues and Back-Benchers—that he will ease the fiscal rules on which the Budget is based. Fortunately, this nonsense has so far had only a slightly dampening effect on investors and markets, but it has had an undoubtedly dampening effect on business activity for the last two or three months. Will the Minister ask his colleagues to consider returning to Budget purdah in future years? If this circus is now to be the pattern for every Budget throughout this Parliament, then, sooner or later, we are going to have market speculation and a financial crisis of the kind that followed Liz Truss’s Budget.

The noble Lord is far more experienced in these matters than me, and I have the greatest respect for him. He mentioned three types of activity. The first one he mentioned was the manifesto commitments we gave: he mentioned the major taxes and he is absolutely right. In our manifesto, we committed to not increasing taxes on working people, which is why we will not increase the basic, higher or additional rates of income tax, national insurance or VAT. I think it is perfectly right that we do that and specify that in our manifesto. He also mentioned speculation. There has been huge speculation ahead of this Budget around specific taxes which at this Dispatch Box, on multiple occasions, I have been unable to comment on, and I think he will understand why. As for announcements being made ahead of a Budget, that is a perfectly routine thing to do, and it is right that Parliament then has the opportunity to scrutinise those at the appropriate moment.

My Lords, I broadly welcome the Government’s Statement, but we have to recognise that so many fiscal rules have come and gone in recent years that the credibility of the macroeconomic framework has been severely dented. Can the Financial Secretary confirm that the investment rule will apply to a specific year and not take the form of a discredited five-year rolling period where fiscal virtue is for ever deferred? Does he agree that what matters more than any rule is whether the Government have a credible plan for promoting growth and for stabilising and ultimately reducing the country’s debt in relation to national income?

Once again, I address a noble Lord who has far more experience in these matters than I do. I agree with a huge amount of what he says. I think that stability in fiscal rules is incredibly important and that they should not change particularly frequently—perhaps at the point when Governments change. I am tempted to agree with a lot of what he said, but unfortunately the Chancellor will set out the Government’s full fiscal plan, including the precise details about fiscal rules that he asks for, in tomorrow’s Budget, alongside an economic and fiscal forecast produced by the OBR.

My Lords, does the noble Lord agree that the noble Baroness, Lady Vere, is quite wrong when she suggests that the Chancellor has just announced her change in fiscal rules? They were proposed in her Mais Lecture in February, if one keeps up. Does he also agree that the fiscal rules implemented by Mr Hunt were yet another component of the irresponsible economic policies pursued by the Conservative Government?

I wholeheartedly agree with both points made by my noble friend. Our fiscal rules, as he says, were set out by the Chancellor in her Mais Lecture and set out again in our manifesto. Everything that we have said subsequently is consistent with what we said in our manifesto, and I think that the policy of the Opposition is the reason our country is in the state it is in. It is why growth has been held back and why our critical infrastructure is basically on its knees.

My Lords, I am a little confused. The Chancellor said before the election that she would not change the fiscal rules, because that would be fiddling the figures. Was she right then and wrong now? Can the Minister explain why we are having this Statement at all, ahead of the Budget? Why is it not part of the Budget consideration? Is it to distract attention from the fact that the Government are basically fiddling the figures and, in fiddling the figures, committing us to borrow more money to pay the interest on the money that has already been borrowed?

The noble Lord knows that I have huge respect for him, so I hate to say when he is wrong, as I think he is in his first point. We were extremely clear that we would change the fiscal rules to the new ones that we set out, first, as my noble friend Lord Eatwell said, in the Mais Lecture and then in our manifesto, which said: “This represents a clear break from the Conservatives who have created an incentive to cut investment; a short-term approach that ignores the importance of growing the economy”. We were crystal clear that we would change the fiscal rules. On the second point, it is perfectly reasonable that, when the Chancellor is at the IMF, she sets out her policies in this regard.

I thank my noble friend for this Statement; the real meat will come tomorrow. I also thank noble Lords opposite for reminding us of their gross irresponsibility and refusal to accept any responsibility for this situation. When you have fiscal rules that distinguish general expenditure and investment in one way or another, you need a clear definition of investment. The problem is that pinning down such a definition is difficult in practice. When we on the Economic Affairs Committee took evidence from Joseph Stiglitz, he drew attention to this, instancing the possibility that spending more money on nurses would count as investment towards the sort of growth we need in the economy.

My noble friend makes an extremely interesting point. I am grateful for his support for what I have set out and will take away his point to give it further consideration.

My Lords, the Chancellor can fiddle figures all she likes to allow more borrowing, but that will simply lead to more interest payments, in excess of the £100 billion or so that we already have, which will lead to great damage in the market. The change of fiscal rules on borrowing is apparently to fix an alleged black hole, so would the Minister care to comment on the highly respected IFS director Paul Johnson’s statement that: “The numbers may be a little bit worse than they thought at the time … but the overall picture over the next four or five years is very, very similar to what we knew before the election”?

I am grateful to the noble Lord for giving me an opportunity to talk about the £22 billion black hole left to us by the previous Government. He has done that in the past and I continue to be grateful to him. The independent Office for Budget Responsibility said at the time of the July statement that it did not know about this black hole at the heart of our finances; it established an independent review into it which will report in due course. I think there will be plenty more information on the £22 billion black hole in tomorrow’s Budget for the noble Lord to peruse.

My Lords, changes to the fiscal rules are welcome, as our devolved Governments need a new fiscal settlement. The Barnett formula has no legal standing, and the convention can be changed by the Treasury. Are there any plans on the horizon to replace the Barnett formula? If so, would this be a needs-based formula to ensure that wealth is redistributed fairly?

I am not aware that the Government have any such plans, but I hope that tomorrow’s Budget will include good news for Wales.

My Lords, the new policy on investment that has been announced will be widely welcomed on this side of the House as giving an opportunity for the public sector, in partnership with the private sector, to raise the dismal rate of growth that we experienced under the last Government. Will my noble friend not let noble Lords opposite get away with the total unsustainability of their fiscal plan to cut public investment from 2.6% of GDP to 1.9%, which would have had disastrous consequences for growth and public services?

I am extremely grateful to my noble friend for that point and for his support for what we have set out. He is absolutely right to draw attention to the record we inherited. As he says, the UK lags behind every other G7 country on business investment as a share of our economy, and the plans we inherited from the previous Government would have seen public sector investment decline to the lowest level in over 10 years. Nothing we have heard so far today suggests that they think there is anything wrong with that. My noble friend also drew attention to the importance of partnership with the private sector. To rebuild our country, it is vital that we increase investment in partnership with the private sector. As he says, we must first create the conditions for the private sector to invest by stabilising our economy and introducing reforms to things such as planning and skills. The Government must invest alongside business, through expert bodies such as the new national wealth fund, to catalyse more private sector money. As we have been discussing today, there is also a significant role for public investment to play.

My Lords, when I was Chief Secretary, working with the former Chancellor, the noble Lord, Lord Clarke, every single spending department that presented its plans to me described them as “investment”. There is often a very good case for saying that spending more on nurses or teachers is going to help productivity more than building new hospitals or schools is. Does the Minister agree with me, and indeed with the noble Lord opposite, that without a really tough definition of what investment means, this will turn out to be just an increase in public spending?

It may surprise the noble Lord but, yes, I absolutely agree with what he says. That will be a vital part of the guard-rails we set out in the Budget tomorrow.

My Lords, borrowing to invest in genuine projects that will improve the productivity of the country obviously makes sense, but if the Government are going to look at the fiscal rules again, will they consider when and how they will account for unfunded public sector pensions? At some stage, the country needs to know about those obligations too.

I hear what the noble Baroness says. As I have said already, the Chancellor will set out the Government’s full fiscal plan, including the precise details of our fiscal rules, in tomorrow’s Budget.

My Lords, when the Minister was first talking about the so-called black hole, it was £21 billion. Does he accept that this is actually less than 2% of total government spending? It is almost inconceivable that anybody with their head screwed on properly in the Treasury could not find savings to that amount.

I am very grateful to the noble Lord for allowing me to talk about the £22 billion black hole in the public finances that was covered up from the British people, from this House and from the OBR, which has confirmed it by establishing its independent review. It was always £22 billion, contrary to what the noble Lord says. If he would like to come up with £22 billion of savings, I would more than like to hear them.

My Lords, the Government’s goal in announcing these changes is to increase capital spending. The Minister made reference to putting in place additional process to assess the viability of that capital spending, yet we already have extensive process that can be immensely costly, with organisations such as the Infrastructure and Projects Authority going through public spending and public capital projects with a fine-toothed comb. Exactly how does he think adding additional process to what is already there is going to speed things up, given that the Government are determined to deliver capital projects more quickly?

I am grateful to the noble Lord for highlighting the guard-rails that will be set out tomorrow, when further details will be set out in the Budget.

My Lords, the noble Lord corrected me and said I had made a mistake in saying that the Chancellor had said that she would not alter the fiscal rules, because that would be fiddling the figures. On 9 October 2023, in interviews around the Labour Party conference at that time, that is exactly what she said. She stressed that Labour would not alter the fiscal rules to fit its spending goals, as doing so, in her words, amounted to “fiddling the figures”. What happened between October 2023 and the Mais Lecture to change her mind about the unwisdom of fiddling the figures?

Nothing changed. There is a slight misunderstanding here. We have always been very clear that we would change the previous Government’s fiscal rules. The Chancellor was referring to the fact that we would not change the fiscal rules we set out—and we have not. The fiscal rules that we are delivering absolutely fit our manifesto commitments, and I do not understand the lack of understanding on the Benches opposite. The “stability rule will mean that day-to-day spending will be matched by revenues”, exactly as we committed to in our manifesto—that is a direct quote. In addition, the investment rule will deliver on our manifesto commitment to get debt falling as a proportion of our economy. Both those things were set out in our manifesto, both were set out in the Mais Lecture and both will be delivered in tomorrow’s Budget.

Does the Minister agree that the Labour Party manifesto was, in essence, just smoke and mirrors? There are smoke and mirrors surrounding not only the fiscal rule—I am still trying to understand his sentence about changing your own fiscal rules, but I will leave that there—but what a “working person” is. When one writes a manifesto, one does not do it such that one can get things round the British people; one should do it with clarity. I suspect that there is a certain lack of clarity in the Labour Party manifesto.

I fully sympathise with the noble Baroness that she struggles to understand the concept of keeping manifesto commitments. She will see in the Budget tomorrow that we will keep every manifesto commitment we made to the British people.

My Lords, is the Minister aware that the party opposite made six or seven changes to the fiscal rules between 2010 and when it left office, and never really explained how that worsened the public finances?

I completely agree with my noble friend.