Rachel Reeves has announced a change to the fiscal rules ahead of next week’s budget, allowing her to borrow billions more each year.
The chancellor today confirmed her rules will “make space for increased investment in the fabric of our economy”, amid widespread expectation she will change the way debt is measured.
But former chancellor Jeremy Hunt warned his advice from the Treasury “was always that increasing borrowing meant interest rates would be higher for longer – and punish families with mortgages.”
She said her “investment rule” would “get debt falling as a proportion of our economy”.
“That will make space for increased investment in the fabric of our economy, and ensure we don’t see the falls in public sector investment that were planned under the last government”, she wrote in the Financial Times on Thursday.
She is expected to change the measure of debt to one which includes a wider range of state assets and liabilities.
Her predecessor Jeremy Hunt immediately criticised the plans, adding that the decision to change the definition of debt used in the fiscal rules will “punish families with mortgages”.
He posted on X: “The consistent advice I received from Treasury officials was always that increasing borrowing meant interest rates would be higher for longer – and punish families with mortgages.
“What’s even more remarkable is that the chancellor hasn’t seen fit to announce this major change to the fiscal rules to parliament. The markets are watching.”
Using the new fiscal rule, Ms Reeves would seek to fund about £20bn a year of extra investment using increased borrowing, the newspaper reported, giving her more room for manoeuvre in the 30 October Budget and allow her to invest in Britain’s crumbling infrastructure.
The cost of government borrowing increased on Thursday following speculation about the possible change to debt rules, with the prospect of tens of billion in extra state borrowing sending gilt yields up by as much as eight basis points.
It comes just hours after Sir Keir Starmer said the fiscal event will “face up” to the reality of Labour’s inheritance from the Conservatives.
Ahead of the party’s first Budget in 15 years, the prime minister promised to tackle the hole left in Britain’s public finances and give the public “a sense of how we intend to do business” going forward.
Speaking while travelling to Samoa for a meeting of Commonwealth leaders, Sir Keir addressed Labour’s inheritance from the Conservatives head on, saying: “I am not prepared to walk past it.”
And, setting the stage for the Budget, he said: “It’s our first opportunity to define the way in which we will approach the economy and that’s why I say we will fix the foundations and rebuild the country.
“Fixing the foundations is about facing up to the inheritance and being clear that we’re not going to walk past it.
“We’re not going to continue kicking it into the long grass and pretending it isn’t there.”
He added that, on top of rebuilding the country, the Budget would be about what greater financial stability makes possible in future.
The PM told reporters: “Obviously there are other Budgets to come but this is a significant one which will set the approach, the framework if you like, and it will give a sense of how we intend to do business.
“We are going to tackle the inheritance in this Budget.
“I’m not prepared to put it off and that is a signal of the way I want to do business which is not to pretend our problems aren’t there, it’s to actually roll up our sleeves and deal with it.”
Amid expectations employer national insurance contributions are to be hiked, Sir Keir said Labour will keep its manifesto commitments. The party claims its decision to rule out national insurance increases only applied to employee, not employer, contributions.
And he dismissed fears of entrepreneurs leaving the UK over fears of changes to capital gains tax, saying there is “no reason for them to”.
The PM pointed to the recent UK investment summit he hosted as an indicator of mood music among investors.
“All the feedback back to us has been that it was very well received by a significant number of global investors,” he said.
Some £63bn inward investment resulted from the summit, according to the government.
“I am confident that we will see more inward investment before Christmas to add to that £63bn,” Sir Keir said.
Gita Gopinath, deputy managing director of the International Monetary Fund (IMF), welcomed Ms Reeves’s plans to change the fiscal rules to allow more borrowing for investment.
Speaking to the BBC, she said that “public investment is needed in the UK”. She added: “If you compare the UK to G7 countries, investment has fallen short,” while stressing the need to stabilise national debt over five years.
Labour peer Lord Blunkett warned Ms Reeves against imposing national insurance on employers’ pension contributions, saying it risks damaging retirees’ standard of living.
The former work and pensions secretary wrote in a letter to The Times: “The widespread reporting of a possible extension of employers’ national insurance in next week’s Budget is very worrying.
“It is one thing to increase the rate of national insurance, and quite another to levy this on employer pension contributions.”
He said he would “advise strongly against this”.
