The £40bn funding gap, the £22bn ‘black hole’ and more tricky terms explained
Thursday briefing: The £40bn funding gap, £22bn ‘black hole’ and more tricky terms, explained | The Guardian

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Rachel Reeves, pictured in the House of Commons
17/10/2024
Thursday briefing:

The £40bn funding gap, £22bn ‘black hole’ and more tricky terms, explained

Archie Bland Archie Bland
 

Good morning. I’m really sorry about this, but today’s newsletter is about the extent of the “black hole” in the public finances and the government’s fiscal rules.

I don’t like this any more than you do: I’d frankly rather be writing about whether King Conker is a cheat. But the budget is nearly upon us, and the chancellor, Rachel Reeves, has started talking about a £40bn funding gap, when you might have only just got used to being alarmed about the £22bn “black hole”. Several of today’s front pages carry reports of planned tax rises to balance the books; meanwhile, Reeves is planning to redefine debt to give herself more room for manoeuvre. If you have found yourself confused by this, congratulations on at least paying close enough attention to notice how knotty it all is.

There’s lots to unpick. For today’s newsletter, Ben Zaranko,a research economist with the Institute for Fiscal Studies (IFS), helps explain what you need to know in the clearest possible terms. Here are the headlines.

Five big stories

1

Music | Liam Payne, a former member of the boyband One Direction, has died after falling from a third-floor hotel room in Buenos Aires. Hundreds of fans gathered outside the hotel to pay tribute after the news, while authorities in Argentina said they were investigating the circumstances of Payne’s death.

2

National security | Counter-terrorism police are investigating whether Russian spies planted an incendiary device on a plane to Britain that caught fire at a DHL warehouse in Birmingham in July, the Guardian can reveal. Investigators are examining possible links with a similar incident in Germany, also in July.

3

Extremism | An international network of “race science” activists seeking to influence public debate with discredited ideas on race and eugenics has been operating with secret funding from a multimillionaire US tech entrepreneur. Seattle businessman Andrew Conru pulled his support after being approached by the Guardian.

4

Asylum | Nearly 63,000 people who were waiting for their cases to be processed at the time of the general election are expected to be granted asylum after Labour dropped the Rwanda deportation scheme, an analysis has found. The Refugee Council said the asylum backlog was on track to be 59,000 cases lower at the start of 2025 after the processing of claims accelerated.

5

US election | Kamala Harris said her presidency “would not be a continuation of Joe Biden’s presidency” in her first interview with Fox News as she criticized Donald Trump over his threats against “the enemy within”. In a contentious interview, Harris was pressed on subjects where she has come under attack from the right including immigration and the rights of transgender people.

In depth: ‘Painting a dire picture may well suit the Treasury’

The Treasury building in Westminster, central London

It’s less than two weeks until the budget – and the picture that Reeves has been painting is a pretty bleak one. By now, you are probably familiar with the claim that the Conservatives salted the earth so severely ahead of the election that the government will be forced to take emergency action. And you will have heard the arguments for and against that proposition – summarised by Paul Johnson, director of the IFS, as genuine dishonesty from the Tories but also “obvious to all who cared to look”.

Until now, the government has been focusing on an estimated in-year shortfall of £22bn in its messaging around the budget – but yesterday’s front pages carried an alarming new number: an estimated £40bn in tax rises and spending cuts needed to avoid a return to austerity.

You could be forgiven for thinking that the situation has just got an awful lot worse – but these numbers refer to different things. If Reeves is now talking about the second figure, that may be because she feels the need to prime the public for an even more drastic set of measures – or to make the reality of the budget feel less draconian when it lands.

“Some of this is likely expectation management,” Zaranko said. “But it’s also about internal negotiations, and painting a dire picture may well suit the Treasury when it’s talking to government departments about their budgets.” (See Eleni Courea’s report from last night for more on this.)

Meanwhile, Reeves is looking at the fiscal rules that act as guardrails on the government’s tax and spending decisions – and may be ready to make a significant change to give herself greater latitude to invest in public services. Here’s how all of that fits together.


£22bn | The expected overspend this year

This figure comes from a Treasury audit of public spending commissioned by Labour after it came to power. That report came back with an estimate of £21.9bn due to be spent in 2024-25 above the limits put in place by the Treasury. Although it’s pretty small as a proportion of overall public spending – expected to be about £1.226tn – it is a larger overspend than has been typical in recent years.

Labour has been keen to paint this number as a “black hole” in the public finances, and you can see why: black holes are scary, massive and threaten to suck everything into them. The ones in space aren’t usually blamed on the Tories, but this one easily can be. But because “black hole” is also used in other contexts, it isn’t very helpful for anyone trying to understand what’s actually going on. “It makes it sound scarier than it is,” Zaranko said. “Calling it an overspend is more accurate and intelligible.”

The really important thing to keep in mind about this figure is that it applies to the current financial year alone. “The big question is how much of it turns into a permanent problem for the government,” Zaranko said. “Money being spent on a one-off basis to send arms to Ukraine is very different to increases in public sector pay across the board, which will persist over time.

“We think, very conservatively, that about half of the £22bn will prove permanent. Obviously, this feeds into the future picture – but the truth is that even if Reeves had taken a look at the books and declared the Treasury a black hole-free zone this year, she would have still had a similar challenge going into the budget.”

Which brings us to …


£40bn | The ongoing annual funding gap for day-to-day spending

This number entered the political discourse yesterday. The FT, which first reported the story, described it as “the funding that Reeves needs to protect key government departments from real-terms spending cuts, cover the enduring impact of an annual £22bn overspend and build up a fiscal buffer for the remainder of the parliament”.

Whereas the £22bn figure just refers to the picture in 2024-2025, “this refers to the challenge over the next few years”, Zaranko said. “We don’t know exactly how Reeves calculates it, but it is probably best understood as the amount that the government needs to find each year if it is going to meet its day-to-day spending commitments without borrowing.”

Labour pledged that there would be no return to austerity, and although there may be spending cuts in some government departments, that means this figure mostly refers to how much will be needed in additional tax each year, which will be detailed by Reeves in the budget.

It’s worth remembering that the government sets its own fiscal rules, and it could make different choices about how much it is allowed to borrow to meet its spending commitments. “There is some agency here,” Zaranko said. “This figure is really a measure of whether you’re hitting your self-imposed targets and, if you’re breaching them, by how much.” That means that another important factor in understanding these figures is how those rules were chosen.

Which brings us to …


The fiscal rules | Borrowing to invest in major projects, but not to cover day-to-day spending

Nimo spoke to Richard Partington last week about the government’s approach to the fiscal rules, and last December Aditya Chakrabortty set out some of the objections to how they are devised. Here’s Aditya on the Conservatives’ rule, adopted by Labour, that debt should be on course to fall as a share of national income at the end of a five-year rolling period:

quote

That just means debt should be falling by the last year of that period. That’s it. Think about what that means: it’s like saying on 1 January, right, I’m going to go on a diet this year, but I’m going to lose all the weight in December.

Nobody would take you seriously if you said that, and economists from a broad spectrum think it’s stupid. Fiscal rules are there to look plausible, they are often broken when it comes to the crunch, and they rely on the public not really knowing what they mean.”

Reeves is not expected to change the rules set out in the Labour manifesto: that day-to-day costs must be paid for with government revenue, and the debt rule outlined above. But she may try to “be a bit clever with them”, as Richard put it, by changing how the national debt is calculated, thereby allowing billions of borrowed money to be used for capital expenditure.

“So that wouldn’t make it any easier to cover public sector pay rises, for example,” Zaranko said. “But it would make a material difference to things like transport infrastructure.”

Neither the £22bn overspend nor the £40bn funding gap take those one-off costs into account. But depending on how the definition of debt is changed, between £10bn and £50bn could be made available.

In the end, Zaranko said, “fiscal rules can only get you so far. They are meant to be a signal of your strategy, not something that sets it.” On borrowing to invest, he added: “It’s really about ensuring that the money is going to worthwhile projects, and how you calculate that. The risk is that the government sets the rules in ways that suit it in the short term without any great strategic reason behind it. But if you then change them again, you further undermine faith in the whole thing – which is already threadbare.”

What else we’ve been reading

Liam Payne.
  • After the awful news of the death of Liam Payne (above), Alexis Petridis writes that despite low expectations when One Direction were formed on the X Factor, “Payne and co succeeded in reinventing the boyband”. See a life in pictures. Archie

  • After a six-year hiatus, comedian Rose Matafeo is returning to standup. Rachael Healy spoke to her about her aversion to endings, building a life thousands of miles away from home and the next steps in her career. Nimo

  • If you love Detectorists, you may wish to celebrate the BBC sitcom’s 10th birthday by reading David Renshaw’s interview with its stars Toby Jones and Mackenzie Crook. I was pleased to learn that Crook’s own coin collection features as a prop in the show. Archie

  • As MPs begin to scrutinise a bill that would legalise assisted dying, a panel of opinion writers make arguments for and against – from Charlie Corke’s call for a “swift, efficient and compassionate” safeguarding system to Lucy Webster’s warning that the pandemic revealed that “neither the state nor society at large can be trusted with any additional powers to take disabled people’s lives”. Archie

  • At least someone covered King Conker … Cheating allegations against David Jakins set the World Conker Championships ablaze after he was found with a metal chestnut in his pocket. Maybe it’s time he abandoned the draconian rules of the WCC and head to south-east London, where conker cheating is embraced. Caroline Davies asked Chris Quigley, the co-founder of the Peckham Conker Club, about why he shuns the rules-based conkers order. Nimo

Sport

Thomas Tuchel at a press conference at Wembley Stadium

Football | Thomas Tuchel (above) made clear his target is to land the World Cup and add a second star to the England shirt, as the German acknowledged it could be win or bust for him after his appointment on an 18-month deal.

Cricket | After England went from 210 for 2 to 225 for 6 yesterday, Pakistan continued to make inroads on the third day of the second Test in Multan and had England at 290 for 9 a few minutes ago, leaving the home side on track for a first innings lead. Follow it live here.

Football | Manchester City had to come through a major scare against the Austrian underdogs St Pölten to secure a seesaw victory in the Women’s Champions League. Gareth Taylor’s side fell 2-1 behind early in the second half but eventually won 3-2 thanks to an 80th minute winner from Australia forward Mary Fowler.

The front pages

Guardian front page, Thursday 17 October 2024

The lead story in the Guardian this morning is “Russia suspected after device put on flight caused UK warehouse fire”. “Reeves will raise capital gains tax on share sales” – that’s the Times, while the Express has the chancellor “accused over ‘bogus’ £40bn black hole”. “Labour’s poll tax” – that’s what the Daily Mail calls the possibility of national insurance going up, while the Telegraph says “Budget to be biggest tax raiser in history”. “Benefits to rise £1.50 a week – as Reeves faces Labour backlash” is the i’s top story. The Financial Times has “Advent primes bid for Tate & Lyle as private equity regains UK appetite”. “Devastating” – the Metro covers a fatal gas explosion that blew apart a block of flats in Benwell, Newcastle. “Beyond a joke” – the “Mrs Brown’s Boys race storm” continues on the front of the Mirror.

Today in Focus

Abortion rights protesters near the Georgia state Capitol in Atlanta on 14 May

How abortion became a battleground issue of the US election

Carter Sherman reports on why the issue of reproductive rights is dominating the US presidential election.

The Guardian Podcasts

Cartoon of the day | Nicola Jennings

Rachel Reeves and Keir Starmer try to fill the ‘fiscal black hole’ – cartoon

The Upside

A bit of good news to remind you that the world’s not all bad

Transition year students Jaspeer Bissora, Adam McGarry, Robyn Duffy and Kacey Kennedy at Kishoge community college, Dublin

In Ireland, 80% of students opt to take part in a transition year (TY), an off-curriculum gap year of sorts halfway through secondary school. There is a loose structure: core subjects like Irish, English and maths still have to be covered, and work experience is encouraged. But it’s up to schools to decide what else to offer.

Students aren’t graded and can take up anything from classical music and drama to bike maintenance. It can have lifelong impacts: Paul Mescal and Cillian Murphy cultivated their love for acting in TY. Though there are drawbacks (costs can be prohibitive for some parents), for those who can take part TY can be transformative.

Sign up here for a weekly roundup of The Upside, sent to you every Sunday

Bored at work?

And finally, the Guardian’s puzzles are here to keep you entertained throughout the day. Until tomorrow.

 
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