Good morning.
There are just three weeks to go until the biggest fiscal and political event for any government: the budget.
Rachel Reeves has been laying the groundwork for months for a painful budget that includes spending cuts and tax hikes to fill what they have called the £22bn “black hole” inherited from the previous government. But many have noted that to achieve the economic growth the Labour party has been promising, the government needs to invest. And that costs money.
Reeves has hinted for weeks that there are plans to change the self-imposed debt rules, which insist the government have debt falling within the next five years. Those plans to deploy an alternative debt metric have now been confirmed. If it goes ahead, the change will allow the government to borrow tens of billions more for capital spending. The chancellor will submit the first draft of her plans on Wednesday to the Office for Budget Responsibility so it can build a forecast for how it will impact public finances.
For today’s newsletter, I spoke with economics correspondent Richard Partington to understand the complex fiscal rules that are set to change. That’s right after the headlines.
Five big stories
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Middle East | Israel has said it is expanding its ground operation in Lebanon with the deployment of a fourth division after another night of intense airstrikes. The reservist 146th division was sent to southern Lebanon overnight, meaning the number of troops on the ground is now likely to number 15,000. The Lebanese health ministry said late on Tuesday 36 people have been killed and 150 have been injured in Israeli attacks over the past 24 hours.
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Environment | Florida’s western coast was making emergency preparations on Tuesday for the impact of Hurricane Milton, with thousands of evacuees clogging highways, contending with fuel shortages, and the mayor of Tampa warning residents bluntly “you are going to die” if they stayed behind.
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Conservatives | James Cleverly has topped the latest MPs’ vote in the Conservative leadership contest, making him the new favourite, as Tom Tugendhat became the latest candidate to be eliminated.
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Poverty | More than 9 million people in the UK experience levels of poverty and hunger so extreme they are vulnerable to reliance on charity food handouts, according to research by the charity Trussell.
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Society | Deaths have outstripped births in the UK for the first time in almost half a century, excluding the start of the pandemic, official figures showed.
In depth: ‘Reeves wants to have some wriggle room by changing the definition of debt’
In 2022, Liz Truss and Kwasi Kwarteng’s mini-budget – in which £45bn of unfunded tax cuts were announced – sent financial markets into a tailspin and damaged the financial credibility of the UK. In response, the next chancellor, Jeremy Hunt, put fiscal rules in place to restore faith and credibility to foreign investors, the public and other government departments that the British government is able to manage its finances in a sustainable way and there are guardrails in place, albeit self-imposed, to withstand dramatic changes.
What are the fiscal rules and why are they changing?
There are two main rules in place hemming in the new Labour government: ensuring day-to-day spending is matched by tax receipts and reducing debt as a share of GDP in the fifth year of forecast.
National debt has risen considerably, spiking initially after the 2008 financial crash and again during the Covid pandemic. Outstanding debt has now reached 100% of GDP, the highest level since the 1960s.
“If you’re setting a rule where debt must be falling within five years, and debt is very high, then you need a couple of things,” Richard says. “The government needs to ensure the economy is growing so that tax receipts are rising, which helps manage debt by bringing in more money, or it needs to ensure that spending isn’t rising.” With Labour’s commitment to invest in the economy to boost growth and fix public services, spending, to some degree, is necessary, leaving Reeves “in a tight position”, Richard adds.
Jeremy Hunt was barely able to stay within the parameters of his own fiscal rule in the spring, leaving just £8.9bn of headroom. As a result, Reeves is constantly running up against the debt rules.
One way to stop running up against these fiscal rules, while still sticking to them and following through with the pledges of economic growth, is to change the goalposts a little.
How might they change?
Fiscal rules have been ushered in by various governments over the past few decades, often to little effect. Reeves did not want to break Labour’s manifesto commitments and abandon the rules, “but she does want to be a bit clever with them”, Richard says. “She wants to have some wriggle room by changing the definition of debt and measuring it differently.” Reeves is looking at a number of different ways to change how national debt is calculated, thus reducing it and giving her more headroom to invest in projects that would help grow the economy in future.
There are a range of options available to Reeves. The first, and most limited, is to change the definition of debt to exclude losses linked to the Bank of England, which would unlock about £10 to 20bn. Reeves could also target public sector net financial liabilities, which would unlock around £50bn.
The most radical step would be to take into account public sector net worth, which includes all non-financial assets and liabilities like buildings, schools and hospitals, in much the same way a business would record a physical asset on its balance sheet. “That’s quite a logical thing to do, because when the government spends money on an asset, it’s not as though that money just disappears and you don’t get anything in exchange for it,” Richard says. High-cost investments are often designed to last for decades and pay off economically in the long term. This method takes account of the benefits of spending and not just the costs and would add approximately £57bn pounds to Reeves’ headroom. If Reeves did opt to go this way, “it is unlikely that she would use up all of that headroom – she would probably want to keep some in reserve,” Richard adds.
Does this signal a change in the government’s attitude to spending?
Reeves is trying to strike two messages at the same time: tough decisions are still required around tax and day-to-day spending on benefits and service delivery in the NHS, education and policing. But, also, the government is willing to borrow to invest and fund large one-off capital projects, like a new power station, offshore windfarms, road and railways. “Stuff that doesn’t, in theory, have a recurring expense, in the same way that paying the salaries of more than a million NHS workers does,” Richard says. How feasible this balancing act is will become clearer in the weeks to come.
What else we’ve been reading
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Sport
Cricket | England chipped at Pakistan’s massive 556, three-centuries total by reaching 96-1 at stumps on day two Tuesday of the first test. Pakistan started the day on 328-4 and was spearheaded by Salman Ali Agha’s unbeaten 104 and Saud Shakeel’s 82. England raced at nearly five runs per over as Zac Crawley smashed 11 fours in his unbeaten 64.
Football | Chelsea held on to beat Real Madrid 3-2 in the women’s Champions League. Chelsea looked in control but some muddled defending led to a scramble and Colombian Linda Caicedo pounced for the Spanish side in the 84th minute.
Football | The former Barcelona and Spain midfielder Andrés Iniesta announced his retirement after a trophy-laden career spanning 24 years. Iniesta, 40, was at the heart of those midfields during a period of sustained success for both teams in the late-2000s and early-2010s.
The front pages
The Guardian leads with “Reeves presses ahead with plans to borrow billions for investment”. The Telegraph says “Chancellor looks at cut to pension withdrawls”. The Times reports “Migration fuels record rise in UK population”.
The Financial Times leads on “Kremlin spies set on sowing mayhem in Britain’s streets, MI5 chief warns”. The Mail follows the same story with “Russia ‘is plotting mayhem’ in Britain”. The i also reports on comments from the security services, under the headline “MI5 warns about Iran plots on British soil”.
The Mirror has “Race against time to nail Maddie suspect”. The Sun’s lead is “Exclusive: Cops’ fury after mayor & home sec ‘pressed met to give Swift Royal blue-light escort’”.
Today in Focus
Unleashed: John Crace digests Boris Johnson’s memoir
The former PM probably hoped this book would make the country fall in love with him again, but it will only revive the resentment, John Crace tells Helen Pidd.
Cartoon of the day | Martin Rowson
The Upside
A bit of good news to remind you that the world’s not all bad
Caroline Butterwick writes evocatively about going on a holiday specially designed for visually impaired people, where vivid scenery is described by fully sighted travel companions. “Joining a standard group holiday as a solo traveller has never felt like an option, worried I’d be left behind or that my white cane would mark me as not belonging,” she writes. This year, however, she found herself in a friendly group who enjoyed “a full itinerary of activities, from a cable car to the top of Zugspitze – the highest mountain in Germany – to walking the steel walkways high above the turquoise waters rushing below at [Austria’s] Leutasch Spirit Gorge”. The trip with Traveleyes has given her “a taste of adventure”, but she adds: “It’s not just the places we visit, it’s the connection between us all: long conversations while out and about, or staying up in the hotel bar laughing and chatting.”
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Bored at work?
And finally, the Guardian’s puzzles are here to keep you entertained throughout the day. Until tomorrow.