Overview

Rachel Reeves is preparing to adjust borrowing regulations in order to allocate billions more for significant projects in the upcoming Budget. Despite these changes, tax increases are still anticipated when Reeves unveils her tax and spending proposals on 30 October.

Key Points

• Chancellor's Commitment: The Chancellor has pledged to ensure that government debt as a percentage of the economy decreases over the next five years.
• Changing Debt Measurement: Reeves is exploring ways to alter how debt is measured, aiming to create more space for long-term investments.
• Tax Receipts and Spending: The government’s promise to cover all day-to-day expenditures with tax revenue limits flexibility, indicating that further tax increases are necessary.

Financial Health Assessment

Reeves intends to prioritize this self-imposed spending rule as the primary measure of the nation's financial health, rather than focusing solely on debt levels.

Collaboration with the Office for Budget Responsibility (OBR)

The Treasury is currently assessing the effects of these proposed changes on public finances in conjunction with the OBR. The OBR's forecast will guide Reeves’ final decisions regarding adjustments to borrowing rules.

Potential Changes Under Consideration

1. Bank of England's Role: One option includes factoring in the Bank of England’s contributions to national debt to allow for greater investment capacity.
2. Broader Debt Measures: A more radical approach might involve considering government assets—like student loans and infrastructure—as part of the debt calculation, potentially freeing up even more funds for investment.

Infrastructure Spending Goals

Reeves has expressed a commitment to reversing previous cuts in infrastructure spending, which fell from 2.6% of GDP last year to a projected 1.7% by 2028-29. She argues that this decline is a significant error.

Opposition Criticism

While opposition parties accuse the government of manipulating fiscal rules, Cabinet ministers argue that Rishi Sunak’s 2021 fiscal policies have hindered investment and contributed to current public service challenges.

Investment Spending Constraints

Despite intentions for increased investment, the Treasury acknowledges that there will be limitations on how quickly and extensively this spending can grow due to existing budgetary rules. The annual interest bill for national debt, currently at £90 billion, must also be funded through taxation.

Next Steps

The Treasury is expected to communicate its proposed Budget measures to the OBR this week so that a preliminary fiscal forecast can be prepared by Monday. This iterative process will continue until finalization on 25 October.