Rachel Reeves has announced a change to the fiscal rules ahead of next week’s Budget, allowing her to borrow billions more each year.
The chancellor confirmed today that her rules will “make room for increased investment in the fabric of our economy”, amid widespread expectation that she will change the way debt is measured.
But former chancellor Jeremy Hunt warned that his advice from the Treasury “was always that rising borrowing meant interest rates would be higher for longer – punishing families with mortgages.”
She said her “investment rule” would “make the debt fall as part of our economy”.
“It will make room for increased investment in the fabric of our economy and ensure that we do not see the declines in public sector investment that were planned under the last government,” she wrote in Financial Times on Thursday.
She is expected to change the size of debt to one that includes a wider range of government assets and liabilities.
Her predecessor Jeremy Hunt immediately criticized the plans, adding that the decision to change the definition of debt used in the tax rules will “punish families with mortgages”.
He wrote on X: “The consistent advice I received from Treasury officials was always that increased borrowing meant interest rates would be higher for longer – penalizing families with mortgages.
“What is even more remarkable is that the Chancellor has not seen fit to announce this major change to the tax rules to Parliament. Markets are watching.”
Using the new fiscal rule, Ms Reeves would seek to fund around £20bn a year of extra investment through increased borrowing, the newspaper reported, giving her more room to maneuver in the October 30 budget and allowing her to invest in Britain’s crumbling infrastructure.
The cost of government borrowing rose on Thursday on speculation about the possible change in debt rules, with the prospect that ten billion in extra government borrowing would send gold yields up by as much as eight basis points.
It comes just hours after Sir Keir Starmer said the fiscal event will “confront” the reality of Labour’s legacy from the Conservatives.
Ahead of the party’s first budget for 15 years, the Prime Minister promised to tackle the gap left in Britain’s public finances and give the public “a sense of how we intend to do business” going forward.
Speaking while traveling to Samoa for a meeting with Commonwealth leaders, Sir Keir spoke directly to Labour’s legacy from the Conservatives, saying: “I’m not prepared to move past it.”
And setting the stage for the budget, he said: “It’s our first opportunity to define the way we’re going to approach the economy and that’s why I’m saying we’re going to fix the foundations and rebuild the country.
“Fixing the foundations is about looking up to the legacy and being clear that we are not going to pass it by.
“We’re not going to continue to kick it into the long grass and pretend it’s not there.”
He added that in addition to rebuilding the country, the budget would be about what greater financial stability enables in the future.
The prime minister told reporters: “Obviously there are other budgets coming but this is an important budget which will set the approach, the framework if you will, and it will give a sense of how we intend to do business.
“We will address the legacy in this budget.
“I’m not prepared to put it off and it’s a signal of the way I want to do business, which is not to pretend our problems aren’t there, it’s to actually roll up our sleeves and deal with it .”
Amid expectations that employers’ National Insurance contributions will be increased, Sir Keir said Labor would keep its manifesto commitments. The party argues its decision to rule out increases in National Insurance only apply to employee contributions, not employer contributions.
And he dismissed fears of entrepreneurs leaving the UK over fears of capital gains tax changes, saying there is “no reason for them to”.
The Prime Minister pointed to the recent UK investment summit he hosted as an indicator of mood swings among investors.
“All the feedback back to us has been that it was very well received by a significant number of global investors,” he said.
Around £63 billion inward investment was the result of the summit, according to the government.
“I am confident we will see more inward investment before Christmas to add to the £63 billion,” Sir Keir said.
Gita Gopinath, deputy managing director of the International Monetary Fund (IMF), welcomed Ms Reeves’ plans to change the fiscal rules to allow more borrowing for investment.
Speaking to the BBC, she said “public investment is needed in Britain”. She added: “If you compare the UK with G7 countries, investment has fallen short,” while stressing the need to stabilize the national debt over five years.
Labor peer Lord Blunkett warned Mrs Reeves against making employers’ pension contributions subject to national insurance, saying it risked harming pensioners’ living standards.
The former Work and Pensions Secretary wrote in a letter to The Times: “The widespread reporting of a possible extension of Employers’ National Insurance in next week’s Budget is very worrying.
“It’s one thing to increase the National Insurance rate, and quite another to charge this to the employer’s pension contribution.”
He said he would “strongly advise against this”.