Reeves Able to Borrow £70 Billion More Under New Fiscal Rules

Chancellor of the Exchequer Rachel Reeves said she’ll change the fiscal rules underpinning the UK’s spending plans in order to boost government investment, a move that could allow Britain to borrow as much as £70 billion ($91 billion) more over the next five years.

(Bloomberg) — Chancellor of the Exchequer Rachel Reeves said she’ll change the fiscal rules underpinning the UK’s spending plans in order to boost government investment, a move that could allow Britain to borrow as much as £70 billion ($91 billion) more over the next five years.

At next week’s budget, the government “will be changing the way that we measure debt” to a new arrangement that will “free up money to deliver a long-term return to our country and taxpayers,” Reeves told reporters on Thursday in Washington, where she is attending the International Monetary Fund’s annual meetings.

The chancellor said she didn’t want to see public sector investment decline, as currently projected, to 1.7% of gross domestic product by 2029 from 2.5% now. “We would be embracing the path of decline and it is not the path that I want for Britain,” she said.

The chancellor is trying to strike a balance between fiscal prudence to keep financial markets on side while increasing investment in roads, schools and other public infrastructure, to drive up economic growth and tax revenues while also ending austerity in public services. Reeves’s remarks on Thursday confirm speculation that had mounted ahead of the Oct. 30 budget that she would alter her fiscal rules, and in particular the measure of debt that guides them, in order to allow Britain’s new Labour government to make those investments. 

“The reason we’re doing that is because there are massive opportunities to invest in Britain,” Reeves said in a Sky News interview. “To get the growth and jobs for the future here for the UK, it’s not possible under the current rules.”

Maintaining investment spending at 2.5% of GDP across the parliament would cost a cumulative £70 billion, according to Ben Zaranko, a senior research economist at the Institute for Fiscal Studies. Reeves said she would set out the path for public sector net investment in next Wednesday’s budget.

At the IMF, the chancellor told fellow finance ministers that everything Labour plans will be “built on the rock of economic stability.” 

However, markets wobbled at news of the scale of the potential borrowing, with the spread between gilt yields and German bunds widening after a report in the Guardian newspaper late Wednesday. The yield on 10-year gilts rose as much as seven basis points to 4.27% on Thursday, widening the spread over equivalent German notes to 199 basis points, the highest in a year. 

The International Monetary Fund this week supported the prospect of Britain moving to a debt rule that allows more growth-enhancing investment but also warned that UK debt is already on an unsustainable upward trajectory, before Reeves announced her plan to borrow more.

At the budget, she’s planning to set out two fiscal rules that will set the tone for Labour’s first term in office since 2010. The first requires her to pay for day-to-day spending out of taxes. To meet that rule with sufficient headroom to give her flexibility in a crisis, Reeves needs about £40 billion from tax rises and welfare cuts.

She refused to be drawn on which taxes will rise but there is widespread expectation that employers will pay more national insurance and that capital gains and inheritance taxes will go up. Income tax thresholds may also be frozen for a further two years. Such a combination could raise about £20 billion, according to analysis by think tanks such as the IFS, Resolution Foundation and the Institute for Public Policy Research.

Reeves’ second rule is that debt must be falling in the fifth year of the official forecast. The measure of debt has yet to be defined but is widely expected to be “public sector net financial liabilities,” which captures the value of assets created alongside the cost of any investment, effectively removing the debt from the books. As a result, the National Wealth Fund and GB Energy would have more scope to invest.

Compared with the existing measure of “public sector net debt excluding the Bank of England,” PSNFL will give Reeves £53 billion of additional annual borrowing headroom. Under PSNFL, she would meet her rule with three years to spare.

Speaking to reporters, the chancellor hinted she may make the debt rule tougher by moving from a rolling five-year target to a fixed date of 2029-30. She said: “It is important to do that in the course of the parliament because otherwise it’s always in the future and it never actually gets met.”

To give markets confidence that Labour will not use all the available borrowing headroom, she said “guardrails” will ensure that “any taxpayer money invested will get a return for taxpayers.” The government will also “work with the National Audit Office and the Office for Budget Responsibility to make sure that all those investments are properly validated,” she said. “In terms of markets, that’s why I think these guardrails are important.”

Zaranko said that “the key constraint” on the government’s borrowing for investment will now be its “ability to find good projects and the construction sector’s ability to deliver them,” rather than its fiscal rules.