Chancellor rips up fiscal rules to splurge tens of billions more

Rachel Reeves has confirmed she is tearing up fiscal rules to splurge tens of billions of pounds more on infrastructure.

The Chancellor is overhauling the way debt is measured to increase the 'headroom' for capital spending. 

The move frees the government to invest far more - but has sparked alarm at the prospect of further cranking the £2.77trillion debt mountain. 

Ms Reeves said ministers are 'committing the funding required' to begin tunnelling work to bring HS2 to London Euston station. And billions are being pumped into overhauling school buildings. 

Ms Reeves also insisted that she will toughen the day-to-day spending rules so the books must be balanced in 2029-30. From then on it will have to be balanced in the third year of the forecast - with Ms Reeves saying the goal will be met early. 

Interest rates on gilts - UK government bonds - have been creeping up as markets price in higher risk.  

Labour's 2024 election manifesto said Ms Reeves would follow two rules: The current budget would be in balance so that day-to-day costs are met by revenues.

The second rule is that debt must be falling as a share of the economy by the fifth year of the economic forecast.

Currently that measure is based on public sector net debt (PSND). 

However, Ms Reeves has confirmed that the way debt is measured as part of that target will be changed to allow greater flexibility.

She is instead targeting public sector net financial liabilities (PSNFL) as her new benchmark.

That is lower because it includes a wider mix of state assets and liabilities – notably including expected student loan repayments to offset some of the liability.

But critics say that those types of assets should not be borrowed against because they cannot practically be realised.  

Had PSNFL been used as the debt target in the March 2024 budget, the 'headroom' – the margin by which the fiscal rule is met – would have increased by £53billion.

Ms Reeves told the Commons: 'As set out in our manifesto, we will target debt falling as a share of the economy.

'Debt will be defined as public sector net financial liabilities, or 'net financial debt', for short – a metric that has been measured by the Office for National Statistics since 2016, and forecast by the Office for Budget Responsibility since then too.

'Net financial debt recognises that government investment delivers returns for the taxpayer, by counting not just the liabilities on a government's balance sheet, but the financial assets.'