Rachel Reeves has vowed to “invest, invest, invest” as she prepares to increase borrowing to fund a multibillion-pound capital program in this month’s Budget.
But the British chancellor also sought to reassure nervous markets, telling the Financial Times that he intended to put “guardrails” in place and was not in a “race to get money out the door”.
“It’s important to make smart, prudent investments over the long term, and we need guardrails to do that,” she said.
Mr Reeves also said in the interview that the tax increase would help plug the £22bn hole in public finances he identified and ease pressure on government departments facing real cuts. “There will be no return to austerity,” she said.
Mr Reeves has signaled his intention to ease borrowing rules in his budget on October 30, the first of a Labor government since 2010, to fund additional capital investment in areas such as green energy projects and transport plans. are.
But Reeves said the Office for Budget Responsibility, the fiscal watchdog, and the National Audit Office, the spending watchdog, would play a key role in scrutinizing his plan and assessing its long-term value. said.
“We will look at the role of institutions such as the NAO and OBR, for example, to ensure and demonstrate that investment truly drives growth,” she said.
The yield on the 10-year Treasury note was 4.12% on Friday, its highest level since late July, partly reflecting investor concerns that Mr. Reeves would significantly increase borrowing in his budget. I am doing it.
Analysts also say the chancellor should introduce stricter scrutiny of investments to monitor valuations and net returns, reducing the risk of public money being wasted on poorly rated projects. There is.
Mr Reeves’ advisers have been discussing how to ensure that the growth-promoting effects of public spending are fully reflected in the OBR when compiling the fiscal outlook. “Invest, invest, invest is the theme of this budget,” she said.
But part of the problem is that even though this is a prime minister’s term, it takes time to implement projects, so it takes up to five years before most of the growth benefits from new infrastructure projects are felt. There is a possibility that it will take more than that. Evaluated based on her financial rules.
He said: “In the Budget, we expect the OBR to consider not only the short-term impact of boosting capital investment, but also the long-term impact and catalytic impact of public sector investment concentrating on private investment.” said.
Mr Reeves was speaking on a train from London to Merseyside, where he and Chancellor Keir Starmer announced more than £21bn of support over 25 years to help develop the carbon capture and storage industry.
The Chancellor confirmed he was considering a review of fiscal debt rules to “take into account the return on investment, not just the costs”, but did not say how much this would allow for borrowing for capital expenditure. I avoided it.
Reeves plans to stick to his rule that net debt as a share of GDP should fall between the fourth and fifth years of the forecast, but crucially he looks to changes in how debt is defined. That’s what I’m doing.
Switching to balance sheet measures such as public sector net assets and public sector net financial debt would increase budget space by more than £50bn by the end of parliament, allowing tens of billions more to be borrowed for investment. .
The investor wants reassurance that only a portion of this additional borrowing capacity will actually be used if she chooses this route.
Mr Reeves inherited from the previous Conservative government a plan to slash net public sector investment one after another.
Reversing these cuts and keeping net investment as a share of GDP at this year’s levels would result in an additional £24bn a year in spending by 2028-29, the Institute for Fiscal Studies said. Treasury officials admitted that this figure would be “difficult” to achieve.
Mr Reeves also scrapped former Conservative Prime Minister Jeremy Hunt’s spending plans, which implied real cuts to “unprotected” departments such as the Ministry of Justice and local government, and called for tax increases to boost Whitehall’s day-to-day budget. I’m also planning to use my budget.
“The purpose of this Budget is to clean up the slate and also take an honest assessment of spending pressures and taxes,” she said. “The previous government fiction. This budget is an opportunity to bring fiscal integrity. ”
Mr Reeves hinted that the £22bn financial “black hole” he claimed to have unearthed this year was not a one-off. Many of this year’s costs, such as public sector pay increases, will recur later along with other unforeseen costs and will require permanent funding.
“The truth is that adding an extra £22 billion a year means that the previous government’s fiscal rules no longer apply,” she says. She has so far declined to set a timetable for balancing the current budget, but said “five years is clearly the longest.”
Reeves said the need to find tax revenue to cover recurring costs is “the real binding force in this budget.”
He suggested that wealthy people should accept that they will have to pay their share, arguing that “bringing stability back” to public finances would lay the foundations for growth and future wealth creation.
The budget foresees tax increases (albeit to a reduced scale) on private equity executives, private school tuition fees, and non-dams, along with speculation of higher capital gains tax rates. “I’m not being ideological about this, but we need to raise money,” Reeves said.
Meanwhile, Mr Reeves acknowledged the public was upset by recent controversy over clothing and other gifts donated free of charge to Labor Party leaders. The issue comes after her early decision to cut £1.5 billion in winter fuel payments to around 10 million pensioners in the face of severe financial pressures.
Ms Reeves received a total of £7,500 from old friends in 2023 and this year, which was used to buy clothes ahead of the election. She also accepted tickets to Adele’s concert.
“I understand why people think it’s a little strange,” she said. “Since becoming Prime Minister, I have not received any donations. When you are in government, you are making decisions that actually affect the people, so it is important that you adhere to higher standards. ”
