Rachel Reeves plans to change borrowing rules to free up billions of pounds of spending on big projects in the upcoming budget.
The German chancellor has pledged to implement a self-imposed rule requiring debt – the total amount of debt the government owes – to fall as a share of the economy within five years.
She is now deciding how to change the way debt is measured to create more room for long-term investments.
The change will not prevent the need for further tax increases when Reeves announces her tax and spending plan on Oct. 30.
The government’s commitment to fund all day-to-day spending with tax revenues means there is little flexibility in this area.
In fact, Reeves will make this self-imposed spending rule the primary way to assess the country’s financial health, not its debt.
The Treasury is currently studying the impact of these changes on public finances with the Office for Budget Responsibility, an independent regulator.
Its projections of how much money will be released will inform Reeves’ final decision on how to change the rules.
The precise measure of the current target debt will be finalized in the coming days.
Options being considered by Reeves include excluding Bank of England losses from national debt to create more room for more investment spending.
Repaying the Bank of England’s massive pandemic-era support means this broader measure of debt is higher and falls faster, making it easier to meet the target of a fall in the national debt between years four and five.
A more aggressive measure of debt that included government assets such as student loan books or highway networks could increase the amount invested more significantly.
The German chancellor has made clear that she will reverse in parliament cuts to infrastructure spending, which represents a share of the economy inherited from the previous government.
Last year, the government invested 2.6% of GDP in major projects, and under existing plans, spending will fall to 1.7% by 2028-29. The chancellor said this autumn was a “mistake”.
While the opposition accuses the government of “tampering” with the rules, cabinet ministers are increasingly speaking out that Rishi Sunak’s 2021 fiscal rules are “anti-investment” and are causing problems for public services .
But the Treasury recognizes that there will be “guardrails” on the pace and scope of investment spending, such as through current key budget rules. The £90 billion a year in interest on the national debt is part of day-to-day spending, all of which needs to be funded through taxation.
The Treasury must inform the UK Budget Office of its possible budget measures this week so that draft fiscal forecasts can be calculated by Monday. This back-and-forth process will continue until October 25 to complete.
