Chancellor Announces Changes to Debt Rules to Unlock Billions for Infrastructure

The UK government plans to revise its self-imposed debt rules to release billions for infrastructure investments, Chancellor Rachel Reeves confirmed in an interview with the BBC. This technical change in debt measurement aims to bolster economic growth and job creation across Britain.

While Reeves’ upcoming Budget is anticipated to include some cuts to public services and tax increases, the shift in how debt is quantified could permit an additional £50 billion in borrowing for significant projects such as roads, railways, and hospitals. However, not all of this funding will be allocated in the upcoming Budget.

“We will be changing the measure of debt,” Reeves stated, promising to provide further details on October 30. She emphasized that the Treasury will implement safeguards by having the National Audit Office and the Office for Budget Responsibility oversee the investments. This oversight is designed to assure markets that the government is committed to delivering value for money on its expenditures.

Shadow Chancellor Jeremy Hunt expressed concerns about the implications of increased borrowing, warning that it could lead to prolonged high-interest rates that would adversely affect families with mortgages. “The markets are watching,” he cautioned.

In response, a Labour spokesperson dismissed Hunt’s critique, stating that the party would not take economic advice from the Conservatives, particularly in light of former Prime Minister Liz Truss’s mini-budget, which resulted in market instability.

Restrictions on Spending

Despite the potential for increased investment, Reeves clarified that the newly available funds cannot be used for everyday operational expenses. She committed to financing routine spending through tax receipts, suggesting that planned tax increases would still go ahead.

Speculation is rife regarding which taxes will be raised, as Labour’s manifesto pledges not to increase taxes on “working people,” including National Insurance, income tax, and VAT. However, the Chancellor hinted that businesses might face a rise in National Insurance, interpreting the pledge as applicable only to employees, not employers.

There has been ambiguity around the government’s definition of “working people.” Prime Minister Sir Keir Starmer noted that he does not consider individuals earning income from assets—such as investments in shares or property—to be working people. He described working people as those who “earn a living” through employment, acknowledging this definition might be broad but aiming to capture the average worker’s experience.

Focus on Fiscal Discipline

Earlier, Reeves emphasized the need for the government to regain control over daily spending by ensuring it is supported by tax revenues and by reforming public services to enhance productivity. She indicated her commitment to a stricter financial rule requiring that all day-to-day expenditures be funded through tax income.

“This rule is crucial and challenging to meet, which will necessitate tough decisions regarding spending, welfare, and taxation,” she explained. Reeves aims to reverse what she perceives as a decline initiated by the previous Conservative administration, which could have led to a reduction in government investment from 2.6% to 1.7% of the economy by 2028-29, amounting to a £20 billion annual decrease.

“If we follow that trajectory, we risk missing out on significant opportunities while other countries capitalize on them,” she stated. “We need to invest more to stimulate our economy and harness emerging opportunities in technology, life sciences, and clean energy, but this requires a reevaluation of how we measure debt.”

Starmer echoed Reeves’ sentiment, arguing that the proposed change to debt rules reflects the “mindset of the new government.” He encouraged a proactive approach to confronting economic challenges.

Economic Support and Concerns

The Treasury had already hinted at potential rule changes before the Budget announcement. Reeves cited endorsements from leading economists, including former Bank of England officials and Conservative Treasury ministers, to support her stance. Gita Gopinath, the IMF’s first deputy managing director, also underscored the necessity for increased public investment in the UK, emphasizing that the country lags behind its G7 counterparts.

However, Paul Johnson of the Institute for Fiscal Studies cautioned in a recent Times article that broadening the debt measure to include public sector net financial liabilities could have unintended consequences, such as unsettling financial markets that underpin the government’s borrowing.

As the government prepares for significant fiscal changes, the impact of these adjustments on public services and overall economic stability will be closely monitored by both analysts and the public.