Can Reeves wriggle her way out of a £22bn black hole?

Rachel Reeves certainly looked very cross when she gravely told the House of Commons the other day that she'd discovered the now infamous "black hole" in the public finances for the current year.

- SEAN O'GRADY

It's certainly true that at least some of that deficit is down to a genuine political choice made by Reeves and the government – the pay boost for teachers coming in at £9bn (or £6bn after efficiency savings), for example.

Still, it means that the chancellor is having to make some painful public spending cuts (including means-testing the previously universal winter fuel allowance), amounting to £5.5bn for the 2024-25 financial year and rising to £8.1bn in 2025-26. That leaves more to be funded from raising taxes (for instance, capital gains tax).

A third option, and arguably a less problematic one, would be simply to amend the precise details of the rules on government borrowing. This is now the subject of some debate...

What could Reeves do?

The idea currently being discussed in fashionable circles is to take the Bank of England’s operations out of the definition of public borrowing that is currently in use. This is a highly technical subject, but some economists argue that it could create an extra £17bn of “wriggle room” in the current fiscal year. That would take a lot of the pressure off Reeves as she approaches her first, defining Budget on 30 October.

Surely it can’t be that simple?

Yes and no. As we remember, the Bank of England created lots of easy money on ultra-low interest rates during the global financial crisis in 2008, and again on an even bigger scale during the pandemic. This was referred to as “quantitative easing”, because it bloated the quantity of money swirling around in the economy, and eased the cost of borrowing it.