Why there is no chance of spending being covered by revenue by 2029 in compliance with Labour’s ‘iron’ fiscal rule
Published on 27th May 2025
Labour has lost control of the UK’s public finances. Day-to-day costs have been increasing. There was a ‘black hole’ but not the one claimed by Chancellor Rachel Reeves. The Labour Government has created several new holes, widening and deepening the overall crater.
This is the message of my paper ‘The UK’s public finances – meeting ‘day-to-day’ costs’ published by Global Britain.
You can download a 4-page summary of the paper here.
Labour’s new ‘iron’ fiscal rule is that day-to-day spending should be covered by revenue by 2029 and not by borrowing. The Labour Government’s actions so far have been to increase the deficit, via various spending measures, many not mentioned in the party’s manifesto.
While Labour claimed to have inherited a £20 billion annual ‘black hole’ from the Tories, it has not justified this claim and indeed has failed to make provision for the same things as the Tories failed to make provision for – like compensation for Infected blood, Grenfell Tower, and the Post Office Horizon IT project.
Instead Labour has raised public sector pay, the opposite of a prudent course in the face of a ‘black hole’. If it existed, Labour has deepened it. Despite introducing some measures that are meant to raise revenue, Labour has presided over a widening deficit, higher borrowing, and higher borrowing costs.
Conservatives should not be congratulating themselves either. Their government presided over a deficit in all but one of their years in office, and steadily increased the overall tax burden. Their actions on personal allowances, capital gains, and ‘Levelling-Up’ were socialist, and attacked wealth creation – and are only now kicking in, in the case of higher council tax for second homes and attacking holiday homes.
Labour’s major increases in Employer National Insurance Contributions and the Minimum Wage are now also just kicking in, and that is a kick – in the teeth of all employers and wealth-creators.
No doubt tax revenues will rise, but they will only reach the levels in Labour’s projections if employers, wealth-creators, and private individuals invest, divest and spend in the same amounts and at the same times – and walk straight into the oncoming train of Labour’s higher tax bills.
They won’t of course. The Government may think it is in charge of revenues, and indeed it can set the scope of taxation and the rate at which tax on taxable events is levied. But the amount received depends on the general economic situation, business and consumer confidence, and business and consumer behaviour, all of these being a feedback loop on the Government’s spending and borrowing.
Spending is out-of-control. The public’s main supposed control over the government’s spending – the Office for Budget Responsibility or OBR – has irresponsibly surrendered its role: it endorsed the government’s Spring Statement showing increased spending now, an increased deficit now, and increased borrowing now, on the basis that the government’s plans for its own investments would cause higher-than-previously-thought economic growth in 2027-29.
Thus, by the Government loading up its own, more benign future projections into OBR’s Excel spreadsheet, the independent forecaster was willing to bless the Government’s current profligacy.
As spending is out-of-control, so too is borrowing. The cost of that borrowing lies within the control of financial markets, not with the Government or the Bank of England.
These factors indicate even higher tax rises in the future, and in sum contribute to worsening the general economic situation, depressing business and consumer confidence, and reining in business and consumer spending and investment.
That promises shortly to deliver a negative feedback in terms of tax revenues received. The Government’s projections, endorsed by the OBR, will come unstuck. Reality will diverge increasingly from the Government and OBR fantasy. The deficit will steadily increase, along with government borrowing, and the cost of that borrowing.
This is the Doom Loop, and the OBR had the chance to shake Labour out of it, a chance it wasted, to our common detriment.