Rachel Reeves will announce at the International Monetary Fund a plan to change Britain’s debt rules that will open the door for the government to spend up to £50bn extra on infrastructure projects.
After weeks of speculation, the chancellor will confirm at the fund’s annual meetings in Washington on Thursday that next week’s budget will include a new method for assessing the UK’s debt position – a move that will permit the Treasury to borrow more for long-term capital investment.
The change to the debt rule will be welcomed by the IMF, which says spending on UK infrastructure projects should be ringfenced as the government seeks to repair the damage to the public finances caused by the pandemic and the cost of living crisis.
Reeves will not specify while in Washington which of the various debt measures under consideration has been chosen, but the Guardian has been told by a senior government source that she will target public sector net financial liabilities (PSNFL).
This yardstick – which will replace public sector net debt – will take into account all the government’s financial assets and liabilities, including student loans and equity stakes in private companies, as well as funded pension schemes.
This would give the chancellor room to increase borrowing for investment in long-term infrastructure.
Reeves said before leaving for the IMF on Wednesday: “A Britain built on the rock of economic stability is a Britain that is a strong and credible international partner.
“I’ll be in Washington to tell the world that our upcoming budget will be a reset for our economy as we invest in the foundations of future growth.
“It’s from this solid base that we will be able to best represent British interests and show leadership on the major issues like the conflicts in the Middle East and Ukraine.”
Labour inherited a set of fiscal rules from Reeves’s predecessor, Jeremy Hunt, dictating that day-to-day spending be met by revenues and that debt as a share of the economy must be falling in the fifth year of forecasts produced by the Office for Budget Responsibility.
Hunt was only narrowly on course to meet his debt rule, by £8.9bn, after announcing large tax cuts despite spending pressures linked to Britain’s high debt servicing costs, ballooning demand on public services and weak economic growth.
Had Hunt adopted a PSNFL target in March, it would have added about £53bn to his borrowing headroom.
The Treasury has hinted that it would not initially take advantage of all the extra scope that a change to the debt rule would provide and would put “guard rails” in place to ensure investment projects deliver value for money. Sources said energy and transport projects would be a particular focus of capital spending in the budget on 30 October.
Reeves will not go for the most radical rule change by adopting the public sector net worth (PSNW) measure, which also includes non-financial assets such as the road network, schools and hospitals, sources said.
The chancellor will say in the budget that the government’s main fiscal rule will be that day-to-day spending should be covered by tax receipts, with borrowing used only for capital spending. The Treasury says this will mean tax increases and spending cuts of up to £50bn.
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Announcing the changes at the IMF will signal that the chancellor is keeping a traditionally conservative body on board with her plans, while aiming to win over the world’s most powerful finance ministers and central bankers.
The push to minimise any reaction in financial markets from a change in the fiscal rules stands in stark contrast to the approach of Liz Truss, who was directly challenged by the fund over her mini-budget in 2022.
A government source said that, while in Washington, Reeves would explain why she thought a change to the debt rule was needed but that full details would be provided in the budget.
Speaking at a press conference to mark the latest release of the IMF’s Fiscal Monitor publication, Vítor Gaspar, director of its fiscal affairs department, said: “As in many other advanced economies, public investment [in the UK] as a percentage of GDP has been trending down.
“Challenges associated with the energy transition, new technologies, technological innovation and much else mean public investment is badly needed.
“The Fiscal Monitor emphasises that public investment should be protected in budgetary procedures that foster sound macroeconomic performance. The fact that that issue is very much at the centre of the debate in the UK right now is very much welcome.”
The IMF has steadily shifted its stance in recent years to favour government borrowing for investment in the right circumstances.
