Chancellor hopes for £50bn windfall with rejig of fiscal rules

Rachel Reeves will free up as much as £50 billion to spend on roads, housing, energy and other large-scale projects under plans being drawn up by officials.The chancellor has asked the Treasury to look at changing the government’s current borrowing rules that would hand her a windfall to fulfil Labour’s pledge to increase investment in the economy.The current system has long been criticised by economists for discouraging governments from making long-term investments that could grow the economy.
Senior government sources said that Reeves has now asked officials to draw up options for changing the way the government measures debt, which could allow the government to offset “assets”, such the £236 billion owed in student loans, against the wider national debt — freeing up more money for investment.
Economists have calculated that if such rules had been in place at the time of the last budget it would have amounted to about £50 billion worth of additional headroom.
This would not only fund the new £7 billion national wealth fund and the £8 billion cost of Great British Energy but also free up billions of pounds to invest in other infrastructure priorities such as new rail and road links and capital investment in the NHS.
However, the move will not allow Reeves to increase day to day spending — for example by reinstating winter fuel payments — as Labour has pledged this must be met entirely from annual tax receipts.
In order to meet Labour’s plans to increase day-to-day spending Reeves is widely expected to raise taxes on capital gains and change the rules around inheritance tax.
The plan comes as Reeves has been forced to reassess another key Labour budget measure after being warned that her plan to crack down on non-dom tax perks might not raise any money. Labour said it hoped to increase tax revenues by up to £1 billion a year by closing tax loopholes that allow some wealthy individuals living in the UK to register overseas for tax purposes.
However, the chancellor is now looking again at the policy, which was intended to fund universal school breakfast clubs and provide more hospital appointments. Reeves has been warned that, as currently designed, it could lead to an exodus of non-doms and potentially even cost the government money.
Leading organisations such as the International Monetary Fund are supportive of changes to borrowing rules that could “allow for public investment in a high debt environment”.
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This week, the Organisation for Economic Cooperation and Development said changing the fiscal rules in a manner similar to that which Reeves has asked the Treasury to examine “could strengthen the incentive for governments to focus on investing in high-quality projects”.
Under the government’s current fiscal rules, national debt has to be falling as a percentage of GDP on a rolling five-year basis.
But the system has long been criticised by economists for allowing ministers to “game” the system and for discouraging long-term investments.
One option being examined by the Treasury would be to move to a system that targets “public sector net worth”, which calculates debt as the difference between the value of government assets and liabilities. At present, government debt does not take into account assets.
Another option would be to exclude certain potential liabilities from the calculation of government debt. This could include things like outstanding student loans and the government’s stake in banks like NatWest — which are currently judged as debt rather than an asset that could be realised.
Treasury officials insist that no final decision has been taken and that debt interest payments from any additional borrowing would still have to be met from tax receipts each year.
Any changes would involve consultation with the government’s independent budget watchdog, the Office of Budget Responsibility (OBR).
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Richard Hughes, the current head of the OBR, has previously backed new fiscal rules to “incentivise prudent investment decisions to address the long-term challenges facing the UK”.
Reeves herself has made it clear that she supports changing the rules, telling a fringe meeting at Labour’s conference in Liverpool this week that it was “important that we count the benefits of public investment and not just the costs of it”, adding: “Other countries look at assets as well as liabilities, and we’re looking at all of those things.”
Isabel Stockton, a senior research economist at the Institute for Fiscal Studies, said they had calculated that either of the two new measurements would give the government scope for more investment.
“If Rachel Reeves were to change the measurement to either a system of net worth or net liabilities then that would give her significant headroom for investment beyond the current fiscal rules,” she said.
“We calculate that if those rules had been in place for the March budget then the headroom would have increased by around £50 billion under both systems. Obviously the fiscal position will be different in October — but it does indicate the scale of the likely impact.”
Tom Railton, director of the Invest in Britain campaign group, said the current fiscal rule “focuses too much on the short-term cost of investment and fails to recognise the substantial long-term benefits”.
A Treasury spokesman said: “The budget will be built on the rock of economic stability, including robust fiscal rules that were set out in the manifesto. These includes moving the current budget into balance, so that day-to-day costs are met by revenues, and debt falling as a share of the economy by the fifth year.”