British Steel Rescue Financial Impact to Examined by ONS
Chancellor Rachel Reeves Faces Fiscal Strains with British Steel Intervention
It appears that the UK's fiscal targets are taking a hit due to the government taking over British Steel, according to a report by City AM. This intervention, facilitated under the Steel Industry (Special Measures) Act, could lead to financial strains and challenges to Chancellor Rachel Reeves' budgetary plans.
Professor Sir Ian Diamond, the UK's top statistician, revealed that the Office for National Statistics (ONS) is conducting an assessment of British Steel's classification as a public body, considering the Labour government's recent intervention. An ONS provisional estimate from this month indicates that the government's borrowing in the year to March exceeded the Office for Budget Responsibility (OBR)'s earlier estimates by £14.6bn, potentially hampering Chancellor Reeves' ability to maintain her £9.9bn fiscal headroom without increasing taxes or reducing spending.
As part of the ONS assessment, estimates for running British Steel will be provided by late May, the office mentioned in a letter to City AM. If classified as a public body, British Steel's costs would be published in the Public Sector Classification Guide and relevant articles on 22 May 2025.
Shadow business secretary Andrew Griffith has called for the ONS to evaluate the impact of the takeover on public finances, citing its potential "significant impact." Griffith pointed out that Chancellor Reeves had set too little headroom in her previous fiscal projections, and that the public purse would be footing the bill for Scunthorpe while Labour continues to withhold a detailed cost breakdown.
Since the takeover, the government has ensured the supply of raw materials, such as iron ore, to keep the Scunthorpe plant operational. Although business secretary Jonathan Reynolds has suggested nationalization remains an option, the plant's operational costs are high due to soaring energy prices and expensive supplies. Previously, Chinese multinational company Jingye stated that the plant was making losses of approximately £700,000 per day due to unsustainable blast furnaces.
Experts from the Institute for Fiscal Studies and EY anticipate that Chancellor Reeves will have to raise taxes in the autumn to restore her fiscal buffer, amid already shaky public finances. The takeover of British Steel is likely to add additional burdens to the public purse.
The opposition parties did not oppose Labour's emergency legislation, while Reform UK had previously advocated for full nationalization. Labour aims to invest £2.5bn in the UK steel industry, seen as vital for defense ambitions, according to its manifesto. A spokesperson for the Department for Business and Trade maintained that the UK's fiscal rules remain non-negotiable, and any required funding for the Scunthorpe site will come from existing budgets.
British Steel's Potential Impact on Public Finances
The intervention in British Steel is likely to have significant implications for public finances and fiscal targets. Areas of concern include:
- Short-term Financial Commitments: The intervention could involve substantial financial outlays for the government, particularly if large-scale aid packages are required to keep the steel plant operational.
- Long-term Benefits: By preserving domestic steel production, the UK may avoid the economic losses associated with losing strategic industries. This preservation could lead to long-term fiscal benefits through taxes and economic stability.
- National Security Justifications: The government has justified its action based on economic security considerations, suggesting that maintaining control over critical industries is essential for national interests. This strategy might lead to increased public expenditure in strategic sectors, but could also prevent future costs related to foreign dependence.
- Public Sector Classification: If British Steel is classified as a public body, its inclusion in public sector finance statistics could affect the UK's deficit and debt calculations.
- Operational Costs and Subsidies: As a public entity, British Steel might require government subsidies to maintain operations and ongoing financial support to keep the steelworks operational.
- Investment in Sustainability: There might be a push for investments in sustainability and low-carbon technologies to align with the UK's net-zero targets. Such investments would necessitate significant upfront costs but could lead to long-term efficiency gains and reduced environmental liabilities.
- The intervention in British Steel is expected to involve substantial financial outlays, as the government may need to provide large-scale aid packages to keep the plant operational.
- Preserving domestic steel production could potentially lead to long-term fiscal benefits through taxes and economic stability, offsetting initial investments.
- The government's strategy of maintaining control over critical industries, such as steel production, could increase public expenditure but avert future costs related to foreign dependence.
- If British Steel is classified as a public body, its inclusion in public sector finance statistics could impact the UK's deficit and debt calculations.
- As a public entity, British Steel might require ongoing government subsidies to maintain operations and keep the steelworks running.
- There could be an emphasis on investments in sustainability and low-carbon technologies to align with the UK's net-zero targets, which would require significant upfront costs but may lead to long-term efficiency gains and reduced environmental liabilities.
