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UK Chancellor Rachel Reeves has paved the way for more government capital spending, prompting a debate on the future of her borrowing rules, declaring: “Growth is the challenge and investment is the solution”.
Reeves told the Labour Party conference on Monday that her Budget would signal “the end of the low investment that led to recession”, with government insiders confirming she wanted to ensure her fiscal rules did not block vital capital spending.
Speaking in Liverpool, the Chancellor took a more optimistic view of the future of the UK economy after being criticised for being too pessimistic, as she insisted the Labour government would invest to grow the economy.
“It’s time for Treasury to move from just counting the costs of investing in our economy to recognizing the benefits as well,” she said. Aides said she wants to change the culture within Treasury.
But there is now a debate within the government about whether Reeves’s financial rules should be amended to allow for more capital spending. She has said she will provide more details in next month’s Budget.
Labor has committed to two key fiscal rules: balancing the current budget, excluding investment, and reducing government net debt as a share of GDP between the fourth and fifth years of forecasts.
Reeves’ decision to move to the current budget rules, announced before the election, was clearly intended to create new room for investment. But she remains heavily constrained by the debt rules.
In a letter to the Financial Times this month, economists including Sir Gus O’Donnell, a former cabinet secretary; Sir Jim O’Neill, a former chancellor of the exchequer under David Cameron; and Mariana Mazzucato, professor of economics at University College London, warned that current debt rules were responsible for an “inherent bias” against investment.
Reeves hinted in her speech that she wanted to find a better way to measure the benefits of investment in the Treasury’s plan, creating space for greater public spending on roads, rail and green infrastructure.
This shows that the prime minister is interested in alternative measures to assess the strength of the public balance sheet.
A broader measure is public sector net worth, which looks at a range of government assets and which an IMF report this year said is “more conducive to public investment and economic growth” than the more traditional approach.
Any changes to such rules would be a “Budget-related matter”, a spokesman for Reeves said.
Tom Railton, director of the Invest in Britain campaign, said the chancellor was right to say that cutting public investment was the wrong economic solution, damaging growth and undermining fiscal sustainability.
“However, the government has inherited plans to cut public investment, as anti-investment financial rules have sent the UK economy into recession,” he added.
Reeves’ speech, which was interrupted by a protest against Labour’s stance on the war in Gaza, was an attempt to reassure business and party MPs that the prime minister has an optimistic vision for the future of the economy.
“I know you’re itching for change and so am I,” she told the audience.
Earlier in the day, delegates booed a decision to postpone a non-binding vote in which the leadership could face a setback over a winter fuel payment plan.
Reeves argued that Labour must address what she described as a £22bn hole left in the party’s accounts by the previous Conservative government.
The Prime Minister added that October Budget will have “real ambition” and will not return to austerity.
Several cabinet ministers, mayors and other senior Labour figures told the FT this weekend that the party leadership had been “gloomy” and “sad” in its first two months in power.
“This budget will be a budget for economic growth; it will be a budget for investment,” the prime minister said. “My ambition has no limits, because I can see the rewards being paid if we make the right choices now.”
In another statement emphasizing the role of the state, she said: “The government cannot just stand aside and let the market operate on its own.”
She said the new government could deliver “a Britain full of opportunity, fairness and entrepreneurial spirit” despite the financial challenges the country faces.
Reeves has announced an accelerated timeline for the party’s pledge to roll out free breakfast clubs to every primary school in England, saying the scheme will start in hundreds of schools from April 2025, before rolling out nationwide. A further £7m will be spent on a “pilot project”.
This would mark “an investment so that in the years to come we can proudly say we have left behind a Britain where the next generation has the chance to do better than those who came before,” she said.
