Thursday 24 October 2024 3:15 pm

Autumn Budget 2024: Chancellor confirms she will reform fiscal rules

Economics Reporter

LIVERPOOL, ENGLAND – SEPTEMBER 23: Chancellor of the Exchequer, Rachel Reeves delivers her speech during the Labour Party Conference 2024 at ACC Liverpool on September 23, 2024 in Liverpool, England. This is Labour’s first conference since they were returned as the governing party of The UK and Northern Ireland by voters in the July election, ending 14 years of Conservative rule. They won with a landslide majority of 172 seats, and 412 in total. (Photo by Leon Neal/Getty Images)

Rachel Reeves is set to change the fiscal rules in the Budget to enable tens of billions of additional investment over the course of the parliament.

Writing in the Financial Times, the Chancellor said that her ‘investment rule’ will “make space for increased investment in the fabric of our economy and ensure we don’t see the falls in public sector investment that were planned under the last government”.

“Sustainable growth does not come from short-termism,” she argued. “It comes from a responsible, long-term plan to invest in the future”.

The Institute for Fiscal Studies (IFS) has estimated that preventing investment falling as a share of GDP would require an additional £24bn in investment spending by the end of the parliament.

That’s because the previous government planned to freeze investment spending in cash terms, amounting to a significant real terms cut. Under Conservative plans, public investment would have fallen to 1.7 per cent of GDP by 2028/29, down from 2.4 per cent at the moment.

While Reeves did not provide details of her changes, reports suggest that the government will target public sector net financial liabilities (PSNFL) rather than government debt.

PSNFL includes the value of financial assets held by the government, such as student loans.

The change would give Reeves space to borrow an additional £50bn a year by the end of the decade, according to official forecasts made in March, though the government is very unlikely to use all of this extra fiscal headroom in one go.

Following reports of the reform this morning, the yield on UK government debt increased. This came amid falling yields elsewhere in the world, which might suggest that investors are nervous about the inflationary implications of an increase in investment.

While the investment rule will be reformed, Reeves confirmed that day-to-day spending will still be met by tax revenue.

“Alongside tough decisions on spending and welfare, that means taxes will need to rise to ensure this rule is met,” she said.