Rachel Reeves has vowed to “invest, invest, invest” as she prepares to boost borrowing to fund a multi-billion pound capital program in this month’s Budget.
But the Prime Minister also sought to reassure jittery markets, telling the Financial Times that she would install “guardrails” and not engage in “a race to get money out the door”.
“It’s about making prudent, sensible investments over the long term, and we need safeguards around that,” she said.
In an interview, Reeves also indicated that higher taxes would help plug a £22 billion hole she had identified in public finances and reduce pressure on government departments, some of which that face real-time cuts. “There will be no return to austerity,” she said.
Reeves has signaled that she wants to relax borrowing rules in the October 30 Budget, the Labor government’s first since 2010, to fund more investment in areas such as energy projects. green energy and transportation program.
But Reeves said the Office for Budget Responsibility, the finance watchdog, and the National Audit Office, the spending watchdog, will have important roles to play in scrutinizing her plans and assess their long-term value.
“We will ensure that investment actually drives growth and we will look at the role of institutions to demonstrate that, such as the NAO as well as the OBR,” she said.
The yield on the 10-year gilt bond was at 4.12% on Friday, the highest since late July, partly reflecting investor concerns that Reeves will sharply increase borrowing in the near future. next. Budget.
Analysts also argue that the chancellor should introduce robust assessments of the investment to police valuations and net returns, reducing the risk of public money being wasted on poorly judged projects.
Reeves’ advisers have been discussing ways to ensure the OBR fully reflects the growth-enhancing benefits of public investment when it puts together its financial forecasts. “Investment, investment, investment is the theme of this Budget,” she said.
However, part of the problem is that the time it takes to deploy projects means that most of the growth benefits from new infrastructure projects could take more than five years to be felt – even though This is the time the prime minister has to do. assessed according to her financial rules.
She said: “I hope that in the Budget the OBR will consider not just the short-term impact of promoting capital investment but also the long-term impact and catalytic impact of public sector investment attracting investment private private”.
Reeves was speaking on a train en route from London to Merseyside, where she and Prime Minister Sir Keir Starmer announced more than £21 billion in support over 25 years for development carbon capture and storage industry.
The Chancellor confirmed she was looking to amend her debt financing rules to “take into account the benefits of investment, not just the costs” but refused to say how much further borrowing would allow for capital spending .
Reeves intends to stick to her rule that net debt as a proportion of GDP should decline between years four and five of the forecast, but importantly she is considering changes in the way determine that debt.
Switch balance sheet measures for example, public sector net worth or net public sector financial debt will increase the budget debt balance to £50bn by the end of parliament, allowing her to borrow tens of billions more to invest.
Investors are looking for assurance that only a portion of this extra borrowing capacity will actually be used if she goes down this path.
Reeves inherits plans from the previous Conservative government, which would have seen successive cuts in public sector net investment.
Reversing those cuts and maintaining net investment at this year’s level as a proportion of GDP would mean an extra £24 billion in annual spending by 2028-29, the Institute for Fiscal Studies said. Treasury officials admit it will be “difficult” to reach that number.
Reeves will also use his Budget to raise taxes to help boost day-to-day Whitehall budgets, tearing up former Conservative prime minister Jeremy Hunt’s spending plans, implying real-life cuts to the “unprotected” sectors such as the judiciary and local government.
“The idea of this Budget is to wipe the slate clean and give an honest assessment of spending and tax pressures,” she said. “The previous government relied on one fantasy. The Budget is an opportunity to bring integrity to public finances.”
Reeves hinted that the £22bn financial “black hole” she claimed to have unearthed this year was not a one-off. Many of this year’s costs – such as higher public sector wages – will recur in later years, along with other unexpected costs, and will require long-term funding.
“The truth is, if you add £22 billion a year, you will be hit by the previous government’s financial regulations,” she said. She has so far refused to set a timetable for balancing the current budget but said “clearly five years is the maximum”.
Reeves said the need to find tax revenue to cover current costs was “the real binding constraint on this Budget”.
She suggested that the wealthy should accept that they will have to pay their share, arguing that “bringing stability” to public finances would underpin growth and wealth creation in the future.
Higher taxes on private equity bosses, private school fees and NGOs – albeit scaled back – are expected in the Budget, with speculation about the level Higher capital gains taxes. “I’m not ideological about this but we need to raise money,” Reeves said.
Meanwhile, Reeves admitted that the public was unnerved by the recent controversy over free clothes and other gifts given to senior Labor Party figures. The problem comes at a time of difficult financial pressures and follows her early decision to cut winter fuel payments by £1.5 billion for around 10 million pensioners.
In 2023 and this year, Reeves received a total of £7,500 from an old friend, which was used to buy clothes before the election. She also received tickets to see Adele’s concert.
“I understand why people think it’s a little weird,” she said. “I have not accepted any donations since I became prime minister. It’s important when you’re in government that you’re held to higher standards because you’re actually making decisions that affect the public.”
