Rachel Reeves has pledged to “invest, invest, invest” as she prepares to increase borrowing to fund billions of pounds of capital programs in this month’s budget.
But the British prime minister also sought to ensure volatile markets, telling the Financial Times he would put in place “guardrails” and would not engage in a “race to get money out.”
“It is important to make prudent and rational investments over the long term and we need safeguards against this,” she said.
In the interview, Reeves also said the tax hike would help plug a £22 billion hole identified in public finances and ease pressure on government departments, some of which face substantial cuts. “There will be no return to austerity,” she said.
Reeves signaled his desire to relax borrowing rules in the October 30 budget, the first by a Labor government since 2010, to support additional capital investment in areas such as green energy projects and transport schemes.
But Reeves said the fiscal watchdog, the Office for Budget Responsibility, and the spending watchdog, the National Audit Office, would play a key role in scrutinizing her plan and assessing its long-term value.
“We will ensure that investments truly drive growth and we will look to the role of institutions such as the NAO and the OBR to demonstrate this,” she said.
The yield on the 10-year bond hit 4.12% on Friday, the highest since late July, partly reflecting investor concerns that Reeves would sharply increase borrowing in the budget.
Analysts have also argued that the Prime Minister should introduce a stronger review of police assessments and net revenue investments to reduce the risk of public funds being wasted on poorly valued projects.
Reeves’ advisers have been discussing how to ensure the OBR fully reflects the growth-enhancing benefits of public investment as it compiles fiscal forecasts. “Investment, investment, investment is the theme of this budget,” she said.
But part of the problem is that the time required to execute projects means that it may take five years or more for most growth benefits from new infrastructure projects to be felt. Evaluated according to her financial rules.
“In the Budget, we expect the OBR to look at not only the short-term impact of stimulating capital investment, but also the longer-term impact and catalytic impact of public sector investment being channeled into private investment,” she said.
Reeves spoke on a train en route from London to Merseyside, where she and Prime Minister Keir Starmer announced more than £21 billion in support over 25 years to develop the carbon capture and storage industry.
The chancellor confirmed he plans to revise fiscal debt rules to “take into account the benefits of investments as well as the costs”, but declined to say how much more borrowing this would allow for capital spending.
Reeves plans to stick to her rule that net debt as a percentage of GDP should decline between the fourth and fifth years of the forecast, but, crucially, she is looking at a change in how debt is defined.
Switching to balance sheet measures such as public sector net assets or public sector net financial liabilities would increase budget space by more than £50 billion by the end of the parliament, allowing her to borrow tens of billions more for investments.
Investors are looking for assurance that only a fraction of this additional borrowing capacity will actually be used if she takes this route.
Reeves inherited the previous Conservative government’s plan to make successive cuts to public sector net investment.
Reversing these cuts and keeping net investment at this year’s level relative to GDP would require additional spending of £24bn a year by 2028-29, the Institute for Fiscal Studies said. Treasury officials acknowledged that achieving this figure would be “difficult.”
Reeves will also use his budget to raise taxes to boost routine Whitehall budgets and tear up former Conservative prime minister Jeremy Hunt’s spending plans, which hinted at substantial cuts to “unprotected” departments such as the Ministry of Justice and local government. It will.
“The idea of this budget is to wipe everything clean and make an honest assessment of the spending pressures and also the taxes,” she said. “The previous government relied on policy. novel. The budget is an opportunity to bring honesty to public finances.”
Reeves hinted that the £22 billion financial “black hole” he claimed to have discovered this year was not a one-off. Many of this year’s costs, such as public sector pay rises, will be repeated later, along with other unexpected costs, and will require permanent funding.
“In effect, adding an additional £22 billion a year would tie us into the fiscal rules of the previous government,” she said. She has so far declined to set a timetable for balancing the current budget, but said “five years is clearly the maximum.”
Reeves said the need to find tax revenue to cover current costs is “a real binding constraint on this budget.”
She suggested the rich should accept that they must pay their share, arguing that “restoring stability” in public finances would lay the foundation for growth and future wealth creation.
The budget is expected to see higher taxes on private equity owners, private school tuition and non-doms, as well as higher capital gains tax rates. “I’m not being ideological about this, but we need to raise money,” Reeves said.
Meanwhile, Reeves admitted the public was unsettled by recent controversy over free clothing and other gifts donated to senior Labor figures. The issue comes at a time of severe financial pressure and after her earlier decision to cut the £1.5 billion winter fuel bill paid to around 10 million pensioners.
In 2023 and this year, Reeves received a total of £7,500 from a long-time friend, which he used to buy clothes ahead of the election. She also won tickets to an Adele concert.
“I understand why people think it’s a little strange,” she said. “I have not received any such donation since I became prime minister. “When you’re in government, it’s important to hold yourself to a higher standard because you’re making decisions that actually impact the public.”
