Chancellor Rachel Reeves was in Washington this week for her first set of International Monetary Fund (IMF) and World Bank annual meetings where she is expected to tell her counterparts that her first Budget will invest in the “foundations of future growth”. She will set out how public investment can boost science and technology, clean energy and better infrastructure. The IMF on Wednesday called on the UK to protect public investment as it urged the country to find ways of accelerating growth. “The last thing you want to cut from the viewpoint of short-run economic activity and medium and long-term growth is public investment,” said Vitor Gaspar, the IMF’s Director of Fiscal Affairs.
Reeves subsequently confirmed that she will change the UK’s fiscal rules to instead focus on an “investment rule” in her Budget next week as she seeks to fund about £20bn a year of extra investment with increased borrowing. Reeves said her investment rule would ensure Britain avoided “the falls in public sector investment that were planned under the last government”. Under plans drawn up by the Conservatives, public sector net investment had been due to fall from its current 2.4 per cent of GDP to 1.7 per cent by 2028-29. This amounted to an annual £24bn cut by that year, the Institute for Fiscal Studies has calculated.
“I won’t cut capital budgets to make up for shortfalls in the day-to-day running costs of departments,” Reeves wrote in the Financial Times. In her effort to fund the investment drive, the chancellor is planning to include government assets in the UK’s measure of debt as she still seeks to have debt falling as a proportion of GDP in five years’ time. Reeves is set to adopt a gauge called “public sector net financial liabilities” (PSNFL). The gauge is a broader measure of the public balance sheet that includes financial assets such as student loans. The change would give Reeves space to borrow an additional £50bn a year by the end of the decade and still have debt falling, under the Treasury’s March forecasts. The £50bn figure is likely to change with new forecasts in the Budget next week and Reeves is not expected to access all of the potential borrowing at this stage.
The Labour government is under pressure to improve Britain’s creaking public services and infrastructure at a time when the tax take is at its highest for decades. The UK’s 10-year borrowing costs continued to rise, after The Guardian earlier reported that Reeves would use the PSNFL gauge. Yields on 10-year gilts were trading at 4.26 per cent, up from 3.75 per cent in mid-September, partly because of anxiety over greater borrowing.
There is a broad consensus that the UK economy is broken and that the new government was elected to repair it, both by engineering a higher growth rate and by restoring the public realm and the services of the state to a minimum level of quality. This implies more spending — both on capital investments and on day-to-day spending. The pre-Budget guessing game has centred on identifying ways in which the government can do this. Most important is really how much money we are talking about.
A new YouGov survey asked voters how their approval of the government would change if Labour delivered but at the cost of higher taxes or worsened public finances. Three of the biggest improvements in approval rates (all in the tens of percentage points) are lower healthcare waiting times even at the cost of higher national insurance tax; better roads and rail services even at the cost of higher government debt; and somewhat improved conditions in social care and education but with higher taxes on high earners and wealthier households.
Quite what voters will make of Labour in 5 years time, we will have to wait and see. But for now, we stand by with some trepidation for next Wednesday’s Budget and we will set out our thoughts and observations once we have had a chance to digest it. We will also produce a guide to the budget for you to read through. Until then, I suggest you have a lovely weekend and try not to think too much about it. You never know, the new Investment Rule could save the day. Maybe.
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