Reeves urged to make simple fiscal rule change to unlock £57 billion at Budget

Experts have urged the chancellor to consider tweaking a Labour manifesto pledge

Rachel Reeves will deliver the new government’s first Budget on 30 October (EPA)

Chancellor Rachel Reeves is reportedly considering making a major change to the UK’s fiscal rules at the Budget on 30 October – and experts say the shift could unlock an extra £57 billion for infrastructure spending.

Ahead of the general election, Labour pledged to follow two rules. The first was that in the current budget costs are met by revenues such as tax. This has proven much more of a challenge for Ms Reeves than anticipated after she unveiled Treasury analysis in late July which showed a £22 billion shortfall in public spending.

The chancellor has acknowledged this herself, saying at a Labour party conference fringe event that the measure would be “incredibly hard” to meet and require “tough decisions” to be made.

The second rule is that debt must be falling as a share of the economy by the fifth year of the economic forecast. This measure rules out excessive borrowing to fill Labour’s black hole, as debt would be driven up as a result.

However, during her speech at conference, Ms Reeves said: “It is time that the Treasury moved on from just counting the costs of investments to recognising the benefits too”. The comment caused experts to speculate that she may be looking to alter Labour’s fiscal rules at the Budget to deal with what Labour calls its unexpected ‘inheritance’.

Rachel Reeves and Keir Starmer at Labour’s 2024 Conference (Stefan Rousseau/PA) (PA Wire)

In a report, the Institute for Public Policy Research (IPPR) has urged the chancellor to do this by adopting a ‘public sector net worth’ target at the Budget instead of her second fiscal rule. In simple terms, this is a measure of the total value of what the government owns, minus what it owes.

The proposed change would mean that Labour aims to increase public sector net worth in year five, rather than reduce debt. This seemingly simple change would enable to government to invest more in infrastructure by looking at the growth potential, rather than just debt.

The IPPR, understood to be influential amongst Treasury officials, compares the change to a company “looking not merely at a company’s indebtedness, but also at its assets and growth strategy.”

Commenting on the findings former Treasury minister and Goldman Sachs executive Lord Jim O’Neill said: “This report highlights how Labour can implement its fiscal rules in a way that embeds a more long-termist approach.

“Focusing on a more comprehensive debt metric – such as public sector net worth – would provide greater room for borrowing to invest in line with more credible transparent rules on deficits and debt.”

Responding to questions about changing its fiscal rule pledges, the Prime Minister’s official spokesman said: “The Government has made clear that one of the first steps of this Government is to restore economic stability in the Budget. It will absolutely deliver on that, delivering on the robust fiscal rules that were set out in the manifesto.”