Rachel Reeves has announced she will tweak the government’s fiscal rules to allow for more investment ahead of next week’s budget.
The chancellor, who had previously promised to use the same models as the previous Conservative government, has said she will introduce an investment rule “that will make space for increased investment” in an op-ed for the Financial Times.
Reeves, who was in Washington DC to attend an International Monetary Fund summit yesterday, was asked about the plans by reporters. She did not give specifics, but said: “I can confirm that we will be changing the way that we measure debt in the budget statement next week, but I’ll set out the details of that to parliament.”
During the election, Labour committed to the previous government’s fiscal rules that the budget must move into balance, so that day-to-day costs are met by revenues, and debt must be falling as a share of the economy by the fifth year of the forecast.
Reeves has said she will stick to these rules but will reverse the previous government’s planned cuts to public sector investment and change the measure of debt.
Under the plans of Rishi Sunak’s Conservative government, public sector net investment was due to fall from 2.4% of GDP to 1.7% by 2028-2029, an annual cut of £24bn.
In the op-ed, Reeves said her “investment rule” will get debt falling as a proportion of our economy and “will make space for increased investment in the fabric of our economy, and ensure we don’t see the falls in public sector investment that were planned under the last government”.
Reports suggest Reeves could switch her measurement of debt from “public sector net debt” to “public sector net financial liabilities”, allowing for the inclusion of all government financial assets and liabilities, including student loans and funded pension schemes. This could allow for around £50bn of extra investment.
Reeves is not expected to adopt the even-broader public sector net worth measure, which also takes into account non-financial assets such as, schools and hospitals.
The chancellor also warned that tax increases and tough decisions on spending and welfare will be needed to achieve her “stability rule” that day-to-day spending will be matched by revenues. “Given the state of the public finances and the need to invest in our public services, this rule will bite hardest,” she said. “Alongside tough decisions on spending and welfare, that means taxes will need to rise to ensure this rule is met. I will always protect working people when I make these choices, while taking a balanced approach.”
Reeves said the fiscal rules “will be the rock of stability at the core” of next week’s budget and “set the basis for stable fiscal policy, prudent management of day-to-day spending and responsible investment for growth”.