Her next trick… how the Chancellor could make debt seem to disappear, as millions prepare for a painful October Budget

Gordon Brown dubbed them. George Osborne modified them.

Now Rachel Reeves is set to follow the example of previous Chancellors by changing the so-called “fiscal rules” – the Government’s self-imposed limits on debt and borrowing.

Tax rules have been changed six times in the last nine years alone, says Lindsay James, investment strategist at wealth manager Quilter.

They are designed to assure financial markets that public finances are stable and sustainable, but they are essentially arbitrary.

Reeves adopted the previous Government’s rules, and these determine how much “room” he has for tax and spending cuts in his inaugural budget next month.

As things stand, he says he must find £22bn in this financial year to fill a “black hole” he claims to have inherited from the previous Government.

Reeves has ruled out raising taxes on “workers.” Labor’s manifesto pledged not to increase VAT, income tax, national insurance contributions and corporation tax, leaving wealth taxes on capital gains and inheritances in the spotlight.

Millions of pensioners are already paying the price as their £300-a-year winter fuel subsidy is being scrapped to save £1.4bn a year.

But Reeves, who has also promised not to return to years of austerity and public spending cuts, could easily raise many billions more by changing debt rules, rather than punishing pensioners and taxing savings.

This is how you could do it.

The key fiscal rule states that net debt as a percentage of GDP – or annual economic output – must begin to fall within five years.

It currently represents 100 percent of GDP, its highest level since 1961, although it is not as high as in other industrialized countries, such as Japan.

The simplest way to reduce that ratio is to exclude the Bank of England’s debt from the Government’s balance sheet. This could be done in several ways.

The Bank of England is losing money by selling the huge portfolio of gilts, or government notes, it accumulated through its money-printing program known as Quantitative Easing (QE). The newly minted money for QE helped prop up the economy after the 2008 financial crisis and during Covid.

The Bank is now undoing the program and in the process incurring multi-million dollar losses, insured by taxpayers. If the reduction continues at the current rate, there will still be a £24 billion charge to the Treasury in 2028-29, according to the New Economics Foundation think tank, unless, of course, the rules are changed.

Reeves will no doubt be tempted to make such huge savings, but critics say it would be just smoke and mirrors.

“It would be replacing an invented fiscal black hole with an invented fiscal savings,” said one prominent economist.

Another option is for her to curb the so-called ‘stealth subsidy’ paid to high street banks and costing taxpayers £40bn a year.

Lenders make a fortune through a little-known scheme under which they receive interest payments on the reserves (piles of cash) they must hold at the Bank of England. NatWest, Barclays, Lloyds and Santander alone received more than £9 billion in interest on these reserves in 2023.

These reserves – amounting to more than £700 billion – emerged mainly as a result of quantitative easing. Banks made virtually no returns on this money when interest rates were low.

However, they are now earning a 5 percent risk-free return because interest rates have skyrocketed and QE is unwinding.

As a result, almost £40bn a year in interest payments are funneled to banks, inflating their profits.

Political figures as diverse as former Prime Minister Gordon Brown and UK reform leader Nigel Farage are in favor of stopping or reducing this problem for banks. But it could lead lenders to raise mortgage rates or cut savings rates in retaliation.

A third option is for Reeves to reclassify what counts as “investment.” Current rules only take into account the immediate costs of the investment, not the potential long-term gains.

“It is time for the Treasury to move from simply counting the costs of investment in our economy to also recognizing the benefits,” Reeves told delegates at last week’s Labor conference. It was their clearest indication yet that fiscal targets could be changed again.

Experts say that if the National Wealth Fund and GB Energy – two new Labor entities created to stimulate growth – were taken off the Government’s books, £15bn would be cut from Reeves’ spending bill.