British Labour Government should ignore irrelevant fiscal ‘black holes’ and worry about the political hole it is digging for itself

The lack of correspondence arises when a government tries to operate within the tight constraints of unjustifiable fiscal rules by proposing legislation that cuts billions in government support for programs that are the difference between abject poverty for millions and a modest standard of living is once again coming to the fore in Britain. The Labour government is obsessed with achieving fiscal rules that are not only arbitrary but cannot be precisely assessed given the deficiencies in the available data and the forecasting techniques. However, the Chancellor tries to convince everybody that there is precision and that major austerity has to be imposed to fit the government fiscal outcomes within the arbitrary constraints they have imposed. Those constraints do not have any context in the things that matter – reducing disadvantage, dealing with inequality, climate change, health care etc. Yet the constant reference to a ‘black hole’ – the difference between the estimated fiscal trajectory and the fiscal rules constraint leads the government to ill-considered policy hacks aimed at keeping the outcomes within the rules. The visceral reaction against the hacks then leads to the situation we have seen in Britain recently, which further undermines the political viability of the government. The only hole that the government should be worried about is the political hole it is digging for itself as a result of its obsession with imprecisely measured and essentially irrelevant ‘black holes’.

The attempt by the Chancellor to smash welfare spending caused a backbench revolt (all power to those Labour MPs who resisted this shocking attempt) and has now put the government in a highly compromised position of its own making.

It was worse because the targetted programs define what a progressive government should be about.

The problem is not the welfare spending but the fiscal rules envelope.

Yet everyone is taking those rules as given and a robust standard upon which to assess the government’s economic management credentials and the government itself is providing all the ammunition to reinforce that flawed position.

For example, after the revolt and the abandonment of the welfare cuts, the government’s own Cabinet Office minister declared (Source):

There’s definitely a cost to what was announced yesterday, and you can’t spend the same money twice, so more money spent on that means less for some other purpose.

The problem is clear:

1. Set some stupid rules.

2. Propose stupid policies to meet those rules.

3. Upset almost everyone because the stupid policies are stupid and damaging.

4. Bunker down and claim the fiscal rules are sacrosanct.

5. Push the government into crisis.

This is a repeating pattern for governments that set up these flawed assessment benchmarks that really cannot be met without massive damage to the economy and social harmony.

There was a lot of talk yesterday about the evolution of the 10-year government bond yield during the Prime Minister’s Question time.

The session began at midday and as it ensued the questions unsurprisingly moved to demanding a commitment from the Prime Minister that the Chancellor was safe in her job.

You can follow the discussion (Q&A) from the – Hansard: Engagements Volume 770: debated on Wednesday 2 July 2025.

A snippet follows:

… (the) welfare Bill was there to plug a black hole created by the Chancellor. Instead, they are creating new ones … The Chancellor is pointing at me, but she looks absolutely miserable … They can point as much as they like, but the fact is that Labour MPs are going on the record saying that the Chancellor is toast. The reality is that she is a human shield for the Prime Minister’s incompetence. In January, he said that she would be in post until the next election. Will she really?

The PM responded saying “the right hon. Lady talks about the black hole, but they left a £22 billion black hole in our economy, and we are clearing it up.”

So while he just agreed with the flawed ‘framing’ (‘black hole’) he then gave no specific commitment about the Chancellor and just attempted to divert.

The Opposition leader responded:

… How awful for the Chancellor that the Prime Minister could not confirm that she would stay in place. He talks about his year in office.

She then launched a tirade about how the Labour MPs “voted for even more welfare spending yesterday” but the Conservative “party believes that this country needs to live within its means.”

Again the PM reinforced that framing with “the Leader of the Opposition always cheers me up. She talks about living within our means, having left a £22 billion black hole.”

Later, there was a rather tepid endorsement from the PM for the Chancellor – “The Chancellor has led on all these issues, and we are grateful to her for it.”

This graph captures the movement in the 10-year bond yield over the course of the day.

Now all the clowns in the commentariat are claiming that the Labour government is approaching the ‘Truss moment’.

It is interesting how these alleged crisis points evolve.

The decision by the Labour government in 1976 to approach the IMF for a loan alleging it did not have the resources to defend the sterling is a long quoted turning point that is used against progressives advocating more government intervention.

Of course that event was a fake to divert the blame for Monetarist-inspired austerity away from the Government to the IMF, as the Labour government tried to maintain its social contract with the unions.

Later when alleged Socialist, François Mitterrand unleashed his Finance Minister Jacques Delors to promote the famous “tournant de la rigueur” in 1983, another major turning point occurred and has long been used by anti-government types to justify their contention that progressive policies cannot work.

Like the British farce in 1976, the Delors ploy was another Monetarist-inspired move to undermine progressive forces in his government and had no necessity in practice.

There have been other turning points.

Most recently, in the British context is the ‘Truss moment’, which apparently signifies the dominant power of the bond markets over the government and which is used to buttress narratives that government policy must always defer to the wishes of the bond markets.

Again, nothing of the sort was demonstrated by the massive turn around in policy by the short-lived Truss administration.

All that happened was the profit-seeking bond markets knew that Truss’s position as PM was doomed and that she would not be resolute in her policy ambitions.

In other words, they knew she would back down as the media barrage hit and they knew that they would profit from that backdown, which they did.

They would have lost had she held her nerve.

As I have noted regularly, the same bond markets can never dominate the Japanese government because the latter does not flip-flop when under pressure.

But the current Labour government is promoting those self-inflicted pressures by lauding the fiscal rules as being the standard by which they want to be assessed.

Thank goodness that a significant group of Labour MPs are forcing Starmer and Reeves to abandon pernicious policy proposals that have no place in a Labour portfolio.

But with the PM and Chancellor insisting on the presence of these mysterious ‘black holes’, which only have accounting meaning because numbers are being assessed against these arbitrary fiscal rules, it is obvious to all and sundry (including bond investors) that the policy positions being advocated by that significant group of MPs are incommensurate.

Maintaining disability support payments or winter-fuel payments to the disadvantaged is not the problem.

It is a problem of the fiscal rules benchmark.

Reducing disadvantage, dealing with inequality, climate change, health care etc. is about people and their well-being

It has a basis in reality and humanity.

‘Black holes’ are arbitrary fictions by economists to make them sound erudite.

But by privileging the latter over the former, the PM and the Chancellor set themselves up for the bond market reaction that occurred yesterday.

Now there is a new narrative about “Who runs this government?”

And that semblance of division only engenders further bond market speculation.

If that wasn’t enough, we had the recent intervention by the so-called independent central bank.

On June 24, 2025, the Bank of England governor appeared before the House of Lords Economics Affairs Committee.

In the transcript – Governor of the Bank of England 2024-25 – Oral evidence – the Governor admitted that the labour market was “softening”.

The issue of the poor performance of the Office of National Statistics was raised.

If you haven’t followed that issue I suggest you do some research and acquaint yourselves of the controversy.

The ONS, itself, has acknowledged major shortcomings in the quality of its data, particularly since COVID became a problem.

One House of Lords member noted:

… there is the question … about the fact that our data are really not tremendously trustworthy or reliable. We have the OBR making very precise predictions and judgments, as it has to do. These feed into fiscal rules, which in turn mean that the Government suddenly jump around at the Spring Statement, so they cut something here and something there.

This is a crucial part of the fiscal rules story.

The estimates by OBR of ‘headroom’ etc (which is just their estimate of how close the government is to breaching its self-imposed rules) are flaky to say the least.

Yet the fiscal rules are held out as precise quantitative targets.

The imprecision leads to significant shifts in policy which are usually not justifiable.

The Governor’s response to the question that was raised in this respect was:

It is not for me to start giving judgment on fiscal policy, but I will say one thing that is exactly on the point you made. It is important to emphasise that this figure of whatever it is—currently £9 billion plus—is a five-year-ahead forecast. Now, if we know one thing about forecasts, it will not be £9 billion, but that is not a helpful thing to say … All I would say is that there is a danger in overinterpreting a five-year-ahead forecast … I would just caution that having the financial markets marking fiscal policy to market on a daily basis is not a good state of affairs …

In other words, the insistence by government that the fiscal rules are non-negotiable, yet in the face of imprecision, knowing that these rules are used by speculators in the financial markets in a daily Pavlovian fashion, is self-inflicted lunacy.

The Governor also couldn’t help himself and soon ventured into making judgements about fiscal policy hinting about the “longer-term sustainability question” of public debt.

His inference was that it was not sustainable, which further exerted pressure on the Government.

Conclusion

This is the sort of shambles that these arbitrary fiscal rules introduce.

They distort sensible public policy discussions.

They create constant political pressure on government and lead to the sort of poor policy and subsequent U-turns that we have seen in the last few weeks.

The U-turns, in turn, lead to claims the government is out of control and unable to govern.

The bond investors make money on the uncertainty.

Meanwhile, the government tries to get away with whatever austerity it can and the result is rising unemployment and hardship.

But the reality is that the fiscal rules are arbitrary and holding them out as a meaningful benchmark just creates a huge ‘hole’ – not the ‘black hole’ nomenclature that everyone is lured into rehearsing at every foreseeable moment, but a huge political hole that the government has dug for itself.

That is enough for today!

(c) Copyright 2025 William Mitchell. All Rights Reserved.