Rachel Reeves will rewrite the Government’s fiscal rules in next week’s Budget to allow it to increase borrowing for public investment by around £50 billion.
Speaking to Sky News in Washington, DC, the Chancellor said: Self-imposed rule Under which borrowing must decline by the fifth year of the economic outlook will be redefined from the current measure of net public sector debt.
Ms Reeves The measure that will replace the current rule will not be specified but there is speculation that it will favor the use of public sector debt net of financial liabilities (PSNFL).
Under this definition, investments such as the government’s student loan book are defined as assets rather than liabilities, which, on current measures, would allow an additional £53bn to be borrowed.
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The Chancellor said that the second fiscal rule, according to which daily spending must be financed from government revenues rather than borrowing, will not change.
Growing consensus
Reeves cited support for increasing the debt limit from leading British economists, as well as the International Monetary Fund, which said this week that public investment must and must be protected. “It is urgently needed” in the UK.
She insisted that change was necessary to end years of declining public investment and move forward exhaustionA promise of growth.
“Under the plans I inherited from the previous Conservative government, net public sector investment as a share of our economy was set to fall sharply during the term of this Parliament,” she said.
“I do not want this path for Britain when there is so much opportunity in industries from life sciences to carbon capture and storage, clean energy to artificial intelligence and technology, as well as the need to fix our crumbling schools and hospitals.”
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What can Chancellor Rachel Reeves announce?
Chancellor Rachel Reeves is looking to find £40bn in the Budget
Ms Reeves denied she was actively manipulating the rules to get around her manifesto pledge not to increase income tax, VAT or National Insurance.
“The really painful rule is the first rule, the stability rule, to fund day-to-day spending from tax revenues. This is something the previous government was not trying to achieve, and we will show in next week’s Budget how we will deliver on that promise.
“The second role is about responsibility. By seizing opportunities, but doing it in a way that we make sure we get value for money for every pound of taxpayers’ money spent.
“Of course we will put in place guardrails to ensure every pound of taxpayers’ money is spent wisely, and we will involve the National Audit Office and the Office for Budget Responsibility in this.”
The first test of the change in the debt base will be the reaction of bond markets, which rose slightly on Thursday after reports of Ms. Reeves’ plans.
Taken together, the redefined fiscal rules set budget conditions that are likely to see tax increases and cuts in public spending balanced with more freedom to borrow.
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He does not rule out higher taxes
Ms Reeves did not rule out a wide range of tax increases, including adding National Insurance to employer pension contributions, which public sector employers may be exempt from.
“I was clear in the statement I made to the House of Commons in July that there would be difficult decisions in this Budget around spending, social care and tax. But the finer details I will put to the House of Commons next week.
“I will be a responsible chancellor. I will be honest and transparent about the challenges we face, but also about how we can fix them to wipe the slate clean after the mismanagement we have seen in the last few years under the Conservatives.”
Shadow Treasurer Gareth Davies said: “Before the election, Rachel Reeves promised she would not tinker with the fiscal rules, and now it appears she will do precisely that. It is striking that she is announcing this not to parliament, but to the IMF ahead of the budget.
He added: “This is already having real-world implications, with borrowing costs rising. Uncertainty about additional borrowing threatens to keep interest rates higher for longer. It is families across the country who will pay the price.”