Reeves to
announce major change to fiscal rules releasing £50bn for spending
After weeks
of speculation, chancellor will tell IMF in Washington that UK’s debt measure
will be redefined to permit borrowing for investment
Larry
Elliott, Pippa Crerar and Richard Partington
Thu 24 Oct
2024 00.00 BST
Rachel
Reeves will announce at the International Monetary Fund a plan to change
Britain’s debt rules that will open the door for the government to spend up to
£50bn extra on infrastructure projects.
After weeks
of speculation, the chancellor will confirm at the fund’s annual meetings in
Washington on Thursday that next week’s budget will include a new method for
assessing the UK’s debt position – a move that will permit the Treasury to
borrow more for long-term capital investment.
The change
to the debt rule will be welcomed by the IMF, which says spending on UK
infrastructure projects should be ringfenced as the government seeks to repair
the damage to the public finances caused by the pandemic and the cost of living
crisis.
Reeves will
not specify while in Washington which of the various debt measures under
consideration has been chosen, but the Guardian has been told by a senior
government source that she will target public sector net financial liabilities
(PSNFL).
This
yardstick – which will replace public sector net debt – will take into account
all the government’s financial assets and liabilities, including student loans
and equity stakes in private companies, as well as funded pension schemes.
This would
give the chancellor room to increase borrowing for investment in long-term
infrastructure.
Reeves said
before leaving for the IMF on Wednesday: “A Britain built on the rock of
economic stability is a Britain that is a strong and credible international
partner.
“I’ll be in
Washington to tell the world that our upcoming budget will be a reset for our
economy as we invest in the foundations of future growth.
“It’s from
this solid base that we will be able to best represent British interests and
show leadership on the major issues like the conflicts in the Middle East and
Ukraine.”
Labour
inherited a set of fiscal rules from Reeves’s predecessor, Jeremy Hunt,
dictating that day-to-day spending be met by revenues and that debt as a share
of the economy must be falling in the fifth year of forecasts produced by the
Office for Budget Responsibility.
Hunt was
only narrowly on course to meet his debt rule, by £8.9bn, after announcing
large tax cuts despite spending pressures linked to Britain’s high debt
servicing costs, ballooning demand on public services and weak economic growth.
Had Hunt
adopted a PSNFL target in March, it would have added about £53bn to his
borrowing headroom.
The Treasury
has hinted that it would not initially take advantage of all the extra scope
that a change to the debt rule would provide and would put “guard rails” in
place to ensure investment projects deliver value for money. Sources said
energy and transport projects would be a particular focus of capital spending
in the budget on 30 October.
Reeves will
not go for the most radical rule change by adopting the public sector net worth
(PSNW) measure, which also includes non-financial assets such as the road
network, schools and hospitals, sources said.
The
chancellor will say in the budget that the government’s main fiscal rule will
be that day-to-day spending should be covered by tax receipts, with borrowing
used only for capital spending. The Treasury says this will mean tax increases
and spending cuts of up to £50bn.
Announcing
the changes at the IMF will signal that the chancellor is keeping a
traditionally conservative body on board with her plans, while aiming to win
over the world’s most powerful finance ministers and central bankers.
The push to
minimise any reaction in financial markets from a change in the fiscal rules
stands in stark contrast to the approach of Liz Truss, who was directly
challenged by the fund over her mini-budget in 2022.
A government
source said that, while in Washington, Reeves would explain why she thought a
change to the debt rule was needed but that full details would be provided in
the budget.
Speaking at
a press conference to mark the latest release of the IMF’s Fiscal Monitor
publication, Vítor Gaspar, director of its fiscal affairs department, said: “As
in many other advanced economies, public investment [in the UK] as a percentage
of GDP has been trending down.
“Challenges
associated with the energy transition, new technologies, technological
innovation and much else mean public investment is badly needed.
“The Fiscal
Monitor emphasises that public investment should be protected in budgetary
procedures that foster sound macroeconomic performance. The fact that that
issue is very much at the centre of the debate in the UK right now is very much
welcome.”
The IMF has
steadily shifted its stance in recent years to favour government borrowing for
investment in the right circumstances.
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