By Bob Lyddon – 4 minute read

Why there is no chance of spending being covered by revenue by 2029 in compliance with Labour’s ‘iron’ fiscal rule

LABOUR HAS lost control of the 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 today by Global Britain available at the foot of this blog.

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 Conservatives, it has not justified this claim and indeed has failed to make provision for the same things as the Conservatives 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 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 i wasted, to our common detriment.

Bob Lyddon is an independent financial analyst specialising in international and central banking.

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FULL PAPER

The UK government’s budget for ‘day-to-day’ costs is out-of-control and deteriorating, and has no chance of being met by revenues by 2029

21 May 2025

Introduction

THIS IS A SUMMARY of the second of four papers on the UK’s public finances, written in the first quarter of 2025, published through Global Britain, and entitled ‘The UK’s public finances – meeting ‘day-to-day’ costs’.

This paper is about the day-to-day costs of running UK government, embracing both the cost of running the government apparatus, and the payments made by government, for example on pensions and benefits.

Labour wants to get to a point where day-to-day costs are fully covered by government revenues, with new borrowing only undertaken for investment.

Despite introducing this objective as a ‘fiscal rule’ that must be met by 2029, the Labour Government’s initial year has seen the UK move farther from achieving it. In fact the costs seem to be out of control and, while the tax take is rising as well, it needs to continue to rise while the economy as a whole is going down – an unlikely prospect.

Day-to-day costs to be met by income

Day-to-day costs are 98 per cent of the government’s budget (but not 98 per cent of public expenditure, as the first paper in the series pointed out). The costs are broadly £488 billion to run the government apparatus including the NHS (which is known as DEL – ‘Departmental Expenditure Limit’) and £742 billion given out, for example as benefits (which is known as AME – ‘Annually Managed Expenditure’. 

Labour’s new fiscal plan requires that all of these costs should be covered by government revenues by 2029, whereas currently there is a major deficit. The deficit is met by an increase in borrowing. In future borrowing would only be permitted to fund the government’s ‘investments’.

Labour maxing out on Tory errors

Conservative commentators rage that Labour has increased taxes and it has, but several areas of increase directly follow Tory trail-blazing and punishment of wealth-creation, such as:

  • Failure to increase the personal tax allowance in line with inflation
  • Freezing and then reduction of the annual amount of capital gains exempt from tax
  • Eliminating the tax credit on dividends
  • Enabling local authorities to apply premium rates of council tax to certain categories of property

The Conservatives were already following the principle of loading tax onto a small minority of high earners so as to relieve the majority from making a meaningful contribution to the cost of the services to which they believe themselves to be entitled.

The Labour Government has simply maxed out on that.

Unfunded risk areas and commitments

In increasing tax takings and spending, but without any serious attempt to stop the rise in the national debt, the Conservatives turned a blind eye to unfunded risk areas and commitments.

The largest is public sector pensions, but the penalty of these is spread over many years. Other items could produce lump-sum liabilities and more quickly, such as indemnifying the British Business Bank for its losses against CIBILS loan scheme fraud, and compensation for Infected blood, for Grenfell Tower, and for the Post Office Horizon IT project.

Labour’s claimed that the Conservatives had left a £20 billion ‘black hole’ – and one recurring every year. The Labour Government is yet to give a proper account of what it meant by this, other than to indicate it thought costs would turn out to be higher than projected once it was able to see the detail behind the projections in the Conservatives’ plans for 2024/5 and beyond, even though those plans had been vetted by the Office for Budget Responsibility.

The inference is that the ‘black hole’ derived from inaccurate estimates of day-to-day costs, not from any of the unfunded risks and commitments landing. That is extremely worrying, as these could still land and send the current government further off course.

Direction of costs since the July 2024 General Election

The picture here is confused firstly by Labour’s refusing to give a proper accounting for the £20 billion per annum ‘black hole’. It is further confused by how the Labour Government has proceeded:

  • Issuing a General Election manifesto that only gave figures for one year, and which failed to mention many measures that it has since implemented, such as withdrawing the Winter Fuel Payment
  • Labour’s immediate actions upon taking office, such as agreeing to significant pay rises for public sector workers
  • Labour’s October 2024 budget, which introduced yet more measures not mentioned in its manifesto, such as the rise in Employer National Insurance Contributions

A further variable is the handling by the Bank of England of its losses on the bonds held in its Asset Purchase Programme, which either produce:

  • A lump-sum loss for the government when the Bank sells a portion of the bonds, the size of the loss depending on medium-term interest rates, which have risen
  • An ongoing loss because the Bank pays a higher interest rate on the money with which it funds the Asset Purchase Programme than the interest rate yielded by the bonds, although cuts in the Bank Rate have reduced the loss

The upshot of all this can be seen in the monthly returns issued by the Office for National Statistics: day-to-day costs sharply increasing.

Direction of revenues since the July 2024 General Election

Revenues have increased since the General Election, not surprising when the economy was reasonably buoyant at the time, and when new lines of taxation were being introduced – both by Labour and through the delayed-action increases ordained by the Conservatives.

Net result so far

Revenues need to rise more quickly than costs in order for the fiscal rule to be met by 2029, that day-to-day costs will be covered by revenues.

Revenues are rising, but not by enough to put them a trajectory to cover cost by 2029, given how costs are increasing along with the government’s cost of borrowing to fund current deficits. 

Cut-in of socialist Tory policies as of April 2025

Now we have the cut-in of the Conservatives’ socialist measures, notably the cessation of the Furnished Holiday Lettings Regime which denies owners of holiday property the right to deduct their mortgage interest costs against tax, and the rises in council tax on certain categories of property as permitted under Tory ‘Levelling Up’.

Cut-in of damaging Labour Government decisions as of April 2025

We also now have the significant rise in the levels of the Minimum Wage and the levels of  Employer National Insurance Contributions (both the percentage at which they are levied and the threshold above which they apply).

Labour’s wooden model as to how individuals and businesses will respond

These measures are bound to have effects like reduced job creation, redundancies, delaying or cancelling investments, and reduced consumer spending.

Labour’s financial models project no changes in behaviour at all. Business owners and individuals will supposedly continue to invest, divest, and spend in exactly the same amounts and at exactly the same times as before, and blunder straight into paying much more tax, diminishing their post-tax profits and earnings, and reducing their wealth.

Supine response of the Office for Budget Responsibility (OBR)

The OBR’s has shown itself to be of no value: it endorsed the government’s Spring Statement showing increased spending, an increased deficit, 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 2027-9.

Thus, by the government’s loading up its own, more benign future projections into its Excel spreadsheet, the OBR was willing to bless the government’s current profligacy. 

Conclusion

Spending is out-of-control. The public’s main supposed control over the government’s spending – the OBR – has irresponsibly surrendered its role.

As spending is out-of-control, so is borrowing. The cost of that borrowing lies within the control of financial markets, not with the government or the Bank of England.

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.

That promises shortly to deliver a negative feedback in terms of tax revenues received, and a consequentially increased deficit, higher government borrowing, and more expensive new debt.

Bob Lyddon is an independent financial analyst specialising in international and central banking.