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Rachel Reeves has confirmed she will change the UK’s fiscal rules in her Budget next week as she seeks to fund about £20bn a year of extra investment with increased borrowing.
Writing in the Financial Times, the UK chancellor said her “investment rule” would ensure Britain avoided “the falls in public sector investment that were planned under the last government”.
Under plans drawn up by the Conservatives, public sector net investment had been due to fall from its current 2.4 per cent of GDP to 1.7 per cent by 2028-29. This amounted to an annual £24bn cut by that year, the Institute for Fiscal Studies has calculated.
“I won’t cut capital budgets to make up for shortfalls in the day-to-day running costs of departments,” Reeves wrote.
In her effort to fund the investment drive, the chancellor is planning to include government assets in the UK’s measure of debt as she seeks to have debt falling as a proportion of GDP in five years’ time.
Reeves is set to adopt a gauge called “public sector net financial liabilities” (PSNFL), according to people briefed on Budget discussions.
The gauge is a broader measure of the public balance sheet that includes financial assets such as student loans.
The change would give Reeves space to borrow an additional £50bn a year by the end of the decade and still have debt falling, under the Treasury’s March forecasts.
The £50bn figure is likely to change with new forecasts in the October 30 Budget and Reeves is not expected to access all of the potential borrowing, the people said.
Markets are watching closely as they try to gauge how much extra borrowing Reeves and Prime Minister Sir Keir Starmer will attempt.
The Labour government is under pressure to improve Britain’s creaking public services and infrastructure at a time when the tax take is at its highest for decades.
The UK’s 10-year borrowing costs rose slightly on Thursday, despite a fall in bond yields in other big economies, after The Guardian earlier reported that Reeves would use the PSNFL gauge.
Yields on 10-year gilts were trading at 4.23 per cent, up from 3.75 per cent in mid-September, partly because of anxiety over greater borrowing.
In her FT article, the chancellor recommitted to getting “debt falling as a proportion of our economy”.
Reeves told reporters in Washington on Thursday she wants to hit the target in the current parliament, which can run until 2029, not on a five-year horizon that rolls forward each year as under the previous government.
“It’s important to get that debt on a downward trajectory and we will do that during the course of this parliament,” said Reeves. “Otherwise it’s always in the future and it never actually gets met.”
She also pointed in the article to “guardrails” that would ensure prudent spending, including new oversight bodies.
Jeremy Hunt, Reeves’s Tory predecessor, was hemmed in by his main fiscal rule to have debt falling in five years’ time according to a fiscal measure called “public sector net debt”, which reflects a much narrower range of assets.
He met the rule while funding pre-election tax cuts in part by pencilling in steep post-election reductions in capital spending.
Former Conservative Treasury minister Andrew Griffith said Reeves’s plan to change her borrowing rules meant she was “breaking promises like a runaway horse charging through jumps at the Grand National”.
Before the general election she had pledged she was “not going to fiddle the figures or make something to get different results” and that “we will use the same models the [then Conservative] government uses”, he said.
The chancellor’s room for manoeuvre will remain hemmed in by another fiscal rule that she sees as the real binding constraint at this Budget: a commitment that day-to-day government spending must be covered by tax revenues.
“Given the state of the public finances and the need to invest in our public services, this rule will bite hardest. Alongside tough decisions on spending and welfare, that means taxes will need to rise to ensure this rule is met,” Reeves wrote in the FT.
Reeves is aiming to close a £40bn funding gap, largely through tax rises, in day-to-day spending to meet this aspect of her fiscal rules, the FT previously reported.
The chancellor is in Washington for her first set of IMF/World Bank annual meetings. She will tell her counterparts that her first Budget will invest in the “foundations of future growth” as she sets out how public investment can boost science and technology, clean energy and better infrastructure.
The IMF on Wednesday called on the UK to protect public investment as it urged the country to find ways of accelerating growth.
“The last thing you want to cut from the viewpoint of short-run economic activity and medium and long-term growth is public investment,” said Vitor Gaspar, the IMF’s director of fiscal affairs.
