Chancellor Rachel Reeves has said she will introduce “guardrails” to ensure that extra borrowing for investment in her first budget is not excessive as she seeks to reassure investors about an expected rise in public debt.
“It’s about making prudent, sensible investments in the long term and we need guardrails around that”, Reeves told the Financial Times in an interview published late on Friday.
Reeves is due to make her first tax-and-spending budget statement on 30 October, a milestone for the new Labour government of Prime Minister Keir Starmer who has promised to increase investment in areas such as infrastructure and the transition to a net-zero economy to speed up Britain’s economic growth.
With public debt at around 100 per cent of annual economic output, investors are waiting to see how much more borrowing Reeves opts for alongside some tax increases.
British gilt yields have risen more than those of other government bonds in recent weeks in part due to concerns about the scale of extra debt sales. At the same time, the warnings about a tough budget have dented consumer confidence, casting a shadow over the first months of the new government.
Reeves and Starmer are mindful of how Britain’s bond market was hit in 2022 by the plans for big, unfunded tax cuts of former Prime Minister Liz Truss which forced her to quit.
Reeves said the Office for Budget Responsibility, which makes the forecasts that underpin the government’s spending and tax plans, and the National Audit Office, a spending watchdog, would scrutinise her plans for public investment which would incentivise private investment too.
“We will make sure that investment genuinely boosts growth and we will look at the role of institutions to demonstrate that, including, for instance, the NAO as well as the OBR,” she told the FT.
Reeves said she hoped the implications of higher public investment over a longer period than the OBR’s five-year forecasting period would be taken into account.
The former Bank of England economist confirmed she planned to revise the government’s fiscal debt rule to “take account of the benefits of investment, not just the costs,” but declined to say how much extra spending those changes would allow.
She also said higher taxes were needed to avoid cuts to already stretched public finances that were implied by the plans of the previous Conservative government.
“There won’t be a return to austerity,” she said. “The idea of this budget is to wipe the slate clean and make an honest assessment of spending pressures and tax as well,” Reeves said. “The previous government was relying on a fiction. The budget is an opportunity to bring honesty to the public finances.”
William Schomberg, Reuters
