Treasury tweaks

Rising borrowing costs and a looming budget shortfall leave Rachel Reeves in a risky position View in browser Adam Smith • Wednesday 23 July 2025 Dear friend, Welcome to today's Sensemaker. Long stories short Gaza's health ministry said 33 people died from malnutrition in 48 hours (more below). The England women's football team qualified for their third major final in a row. Black Sabbath singer Ozzy Osbourne died aged 76. Treasury tweaks Rachel Reeves vowed to stick to her fiscal rules yesterday after a rise in UK borrowing costs piled more pressure on the chancellor.   So what? The rules that constrain day-to-day spending and debt levels are designed to keep the government in check. A costly retreat on welfare and expected downgrade in growth by the OBR mean the chancellor is likely to increase taxes to meet them. But there is another approach, a series of careful tweaks by which Reeves could avoid   an increase in income tax, national insurance or VAT; the political backlash that would come from these rises; and the market response that may come, alternatively, from fiscal loosening.   Promises broken. Most economists are predicting that the chancellor will be faced with a significant black hole to fill, with estimates ranging from £10 billion to £30 billion. If it is towards the upper end of this range, no combination of continuing to freeze income tax thresholds and increasing wealth taxes, banking taxes or gambling duties will raise enough money. Reeves will have to break a tax pledge. At which point, attention might turn to the fiscal rules.   Beware the market reaction. Gilt yields rose sharply when the markets thought Reeves might be replaced by someone more inclined to loosen these rules. So the Treasury will be advising caution when it comes to the current chancellor doing the same.   What can't change. This is why the UK can rule out a complete move away from either Reeves's "stability rule", which relates to spending, or her "investment rule", which relates to debt.   Nothing has changed. But there are tweaks that could be made that would increase fiscal headroom and allow the government to argue that it has stuck to the rules – in the same way it said that increasing employer's national insurance was consistent with its manifesto.   Part one: timing is everything. The current "stability rule" means day-to-day spending must be met by tax revenues.   It must remain in balance or surplus by 2029/30, until that becomes the third year of the OBR forecast. At this point the target year shifts to three years ahead on a rolling basis. As this will happen in a couple of years time anyway, the government could make the change now by keeping the same rule but shifting the target year to 2030/31.   This could be worth around £10 billion. Part two: spending cuts that won't happen. The government has set out its spending plans up to 2028/29. Crucially it won't be setting out departmental allocations for the year the fiscal rule has to be met until the next spending review. In the coming budget, Reeves could make use of the tried and tested tactic of setting the spending growth rate in those two years to save money. This will mean future spending but the chancellor won't have to say where it will fall. It may upset the Institute for Fiscal Studies, which has previously talked about a "conspiracy of silence" over spending cuts, but could save Reeves another £5 billion a year. Part three: a surplus could be a deficit. Finally, the chancellor could make use of the emergency buffer currently written into the existing fiscal rules. This states that once the current target year of 2029/30 is three years away the rules are met even if there is still a deficit of 0.5 per cent of GDP that year. Making use of this now would be worth billions in headroom. The risk. Politically-speaking, these may look like three more attractive options than raising taxes. But even then they may not be enough, and adjusting the fiscal rules is not cost-free. They are supposed to be "non-negotiable" so any change would involve the chancellor breaking a promise. The point of any change would be to increase borrowing, which risks a bond market reaction that drives up the government's debt interest payments. Higher borrowing could also mean the Bank of England is forced to keep interest rates higher than they otherwise would, impacting mortgage costs. Borrowing is borrowing. Reeves's options on fiscal rules involve tinkering around the edges and hoping to get away with it. The markets may not immediately notice these changes but it will quickly become apparent that, however they are dressed up, they mean more borrowing. What's more… Many experts will consider this too risky. The government, as it scrambles to fill an expanding budgetary hole, may not. The Observer News Matrix The Nibs Capital Economy, business and finance Drug money AstraZeneca, the UK's largest listed company and drugs manufacturer, has said it will invest $50 billion to expand production and research in the US. The immediate wider context is Donald Trump's threat to impose 200 per cent tariffs on imported drugs. But it will do little to soothe concerns in the City of London that CEO Pascal Soriot has further plans to move the company's primary stock market listing stateside. AstraZeneca declined to comment on reports earlier this month that such a plan had been privately considered. Delays in the UK's system of medicines approval have become a bugbear for the industry and Soriot has been vocal about the need for drug prices to rise elsewhere to "equalise" with those in the US. AstraZeneca is aiming to lift the share of revenue it makes in the US from 42 per cent to 50 per cent by 2030. Earlier this year the Cambridge-headquartered company pulled out of building a vaccines plant near Liverpool, saying that the business case did not make sense without further support from government. Technology AI, science and new things Midas touch A California nuclear fusion start-up says it has discovered a way to turn mercury into gold, potentially cracking a mystery that has eluded alchemists for millennia. Scientists using particle accelerators have already created small amounts of gold from lead, but the process is expensive. Marathon Fusion claims its technique is "massively scalable". It involves using high-energy neutrons generated by fusion reactions to create an unstable mercury isotope that decays into gold. Marathon says this technique could produce 5,000 kilograms of gold a year per gigawatt of energy generated by future nuclear fusion plants. There is a drawback: nuclear transmuted gold could be partially radioactive, meaning it would have to be stored for up to 18 years before being deemed safe. But the findings could be a boon to the nuclear fusion sector. It has attracted billions in investment thanks to its promise of clean energy with little radioactive waste, but remains costly and energy inefficient. The 100-year life Health, education and government Mounting hunger A third of Gaza's population has not eaten for several days, according to the World Food Programme. People are now starving to death. Gaza's health ministry yesterday said that malnutrition had killed 33 people, including 12 children, in the past 48 hours. Israel has restricted most aid to the enclave since March and handed the task of food distribution over to the Gaza Humanitarian Foundation in order to bypass UN aid sites. The scheme has been ineffective, chaotic and deadly: Palestinians travel long distances to four sites run by private security contractors and routinely come under fire in the process. More than 1,000 people have reportedly been killed seeking aid since May. The violence has deterred some people from travelling to the sites, while those who do go often come away empty-handed. Our planet Climate and geopolitics Hot dam China has started building the world's biggest dam in Tibet. It will cost an estimated $167 billion and comprise five cascade hydropower stations along a mountainous section of the Yarlung Tsangpo River. These will produce 300 billion kilowatt hours of power a year, equal to the UK's entire annual consumption. Chinese premier Li Qiang called the dam "the project of the century" and there are some obvious environmental benefits. But it has rankled India and Bangladesh where the Yarlung Tsangpo turns into the Brahmaputra and feeds into the Ganges delta, which sustains hundreds of millions of people. NGOs also worry that the dam will flood ecologically important sites. This is unlikely to deter China. Although Beijing still builds coal-fired power stations, it is investing heavily in renewables to reduce its need for fossil fuels. Culture Society, identity and belonging Union numberwang An internal report by Unite has found that its former boss Len McCluskey took a private jet flight arranged by the firm that was contracted to build a major hotel complex for the trade union. Unite's auditors found that more than £110 million was spent on the development, which has since been valued at £38 million and was initially meant to cost £7 million. The report found that the Flanagan Group was given the contract for the project with "no competitive tendering process" and was paid £96 million for its work – a figure that included at least £30 million of overcharging. The report also stated that McCluskey received a private jet flight arranged by the Flanagan Group to watch Liverpool play in the 2019 Champions League final in Madrid. McCluskey's lawyers told the BBC that he categorically rejects any suggestion of improper dealings. They said that he paid for his own travel in full and that – to his recollection – he always paid the cost of his football tickets. The Observer has contacted McCluskey's lawyers for comment. Further listening: Inside Unite Thanks for reading. Please tell your friends to sign up and tell us what you think. Adam Smith Chief of staff to the chancellor between October 2022 and July 2024 Additional reporting by Fred Harter, Barney Macintyre and Xavier Greenwood. Graphic by Bex Sander. Edited by Xavier Greenwood.     More from The Observer Read Three years on, the honeymoon is over for Poland's Ukrainian refugees More than a million people fleeing the war have brought many benefits, but a painful history between the two nations and the far-right is stirring divisions Click here to listen → Follow Follow The Observer on social media on your preferred platform:   The Observer     The Observer Food Monthly The Observer Magazine The Observer New Review   Listen Listen for free in the Tortoise app or wherever you get your podcasts: Want to change how you receive these emails? Update email preferences Copyright © 2025 Tortoise Media. All rights reserved. Did this email get caught in your spam filter? Add editor@newsroom.observer.co.uk to your address book to never miss an email again. No longer want to receive this newsletter? Unsubscribe here.