Rachel Reeves is considering changing how the government’s fiscal rules are calculated to allow billions of pounds more in capital spending, according to government sources.
The chancellor told the Labour conference on Monday she believed the Treasury undervalued public investment and wanted to change the way public spending is seen at the top of government.
Sources have confirmed she could use next month’s budget to change the way the government’s five-year debt rule is assessed in a way that could allow more spending on housing, roads and hospitals.
Reeves told delegates in Liverpool: “It is time the Treasury moved on from just counting the costs of investment in our economy to recognising the benefits too.” She added: “Growth is the challenge and investment is the solution.”
At a later business event, she said: “There are difficult decisions coming in the budget, but what I can promise is we will always give value for money for taxpayers. And we will look at the value and benefits of investment and not just the costs.”
Her comments reflect a growing belief in the government that its fiscal rules need to be updated to encourage investment and spur growth.
Critics have accused the Treasury of prioritising short-term debt reduction ahead of its long-term infrastructure and growth needs, pointing to decisions such as the cancellation of the HS2 rail line as an example.
Tom Railton, director of the Invest in Britain campaign, said: “If Labour maintains the discredited Conservative ‘debt stock’ rule, Britain will struggle to escape the economic stagnation that this rule helped to create.
“We need a budget for long-term growth, and that has to start with creating a set of pro-investment fiscal rules focused on long-term growth and sustainability.”
Labour promised in its manifesto to abide by the previous government’s rule that public sector net debt should be falling as a proportion of economic output in the fifth year of a forecast period. But sources say how that debt is calculated is now being reconsidered.
One idea Reeves is weighing up is to exclude losses for the Treasury on the Bank of England winding down its crisis-era quantitative easing bond-buying programme, which experts say could open up headroom in the public finances worth up to £15bn.
Another person familiar with the discussions said the chancellor was considering plans to move Labour’s new institutions, the National Wealth Fund and GB Energy, off the government’s books. Andy King, a former senior official at the Office for Budget Responsibility, has said that could give her another £15bn more headroom for borrowing.
A third option would be to exclude certain projects from the debt calculation if the Treasury calculates they will provide enough of a boost to the economy.
Government officials added that they were also working on a plan to publish estimates for how much new capital projects could stimulate growth, as well as how much money they would generate directly for the Treasury.
These plans are part of what Reeves said on Monday was a strategy to encourage building in Britain.
Painting a more optimistic picture of the country’s long-term economic future than she has in recent months, she said: “What you will see in your town, in your city, is a sight that we have not seen often enough in our country: shovels in the ground, cranes in the sky, the sounds and the sights of the future arriving,” she said. “We will make that a reality.”
She added: “This is our moment, our chance to show that politics can make a difference, that Britain’s best days lie ahead.”
But she also issued a steadfast defence of some of her more unpopular decisions in her first few weeks in the Treasury, including cuts to winter fuel payments to pensioners and to infrastructure projects that she says were not properly funded.
Reeves told the conference: “I know that not everyone in this hall or in the country will agree with every decision that I make. I will not duck those decisions, not for political expediency, not for personal advantage.”
She also defended the government’s decision to raise public sector pay even in the face of the difficult spending outlook. “We made that choice not just because public sector workers needed a pay rise, but because it was the right choice for parents, patients and for the British public, the right choice for recruitment and retention, and it was the right choice for our country,” she said.
“If the Conservative party want to fight about who can be trusted to make the right choices for our public services and those who use them, then I say: bring it on.”
At almost the exact moment she was delivering this message, however, the Royal College of Nursing announced its members had rejected a 5.5% pay increase from the government. Trade unions have been a thorn in the government’s side throughout this conference, and are organising a vote calling for the cut to winter fuel payments to be reversed.
Reeves said next month’s budget would not herald a return to austerity. She told the BBC earlier in the day that Whitehall budgets would rise on average, but would not make the same promise for individual departments.
Economists say an average rise in Whitehall budgets of 1% over inflation – which was assumed under the previous government’s plans – would mean steep cuts to unprotected areas, such as courts and local government.
A Labour official said: “We needed to be honest about the scale of the challenge. The public and businesses want government to be honest. This speech was about the prize at the end of it.”
The chancellor announced little in the way of new policy but did confirm plans, first revealed by the Guardian, to relaunch investigations into £674m worth of Covid contracts. The announcement led to a standing ovation from delegates.
Reeves’s speech was briefly disrupted by a heckler protesting about British arms sales to Israel, which the chancellor reacted to by saying: “We’ve had the years of protest, we’ve had years of division and decline, but left working people worse off.”
