Rachel Reeves must decide by Wednesday whether to change the government’s fiscal rules to potentially unlock up to £57bn in additional spending on infrastructure at this month’s budget.
Sources close to the Treasury said the chancellor would need to make a decision before submitting the “major measures” for her tax and spending event on 30 October to the Office for Budget Responsibility (OBR).
The Treasury has set a Wednesday internal deadline to update the OBR on the chancellor’s plans. The independent watchdog will then use these policies to forecast their impact on the economy and the public finances, before privately sharing its findings with Reeves on Monday next week.
In a new report, the centre-left Institute for Public Policy Research (IPPR) thinktank, which carries significant influence in the Treasury, urged Reeves to target “public sector net worth” as her debt measure to unlock as much as £57bn in additional headroom for investment.
One of the most flattering measurements of the government finances, which is already tracked by the OBR, the gauge takes into account the value of public assets – such as roads, schools and hospitals – as well as debts and other liabilities.
Although a decision is required this week, the chancellor has until 25 October to submit her final resolution to the OBR.
Reeves’ budget will be the first by a Labour chancellor in a decade and a half. It is widely expected to include changes to the fiscal rules to pave the way for an increase in public investment, after hints made by the chancellor in her party conference speech in Liverpool late last month.
In an apparent confirmation when asked by the Guardian last week if she was planning changes, Reeves said: “We’ll set out details of the fiscal rules at the budget, but we have got to make sure we unlock that space for capital investment.”
Labour committed in its manifesto to two fiscal rules: balancing day-to-day expenditure with tax receipts, and getting debt falling as a share of the economy in the fifth year of forecasts. However, Reeves is believed to be exploring using an alternative debt metric to the one used in the rule she inherited from her Conservative predecessor, Jeremy Hunt.
Some economists question whether targeting public sector net worth as a debt measure would be appropriate because of the difficulty in valuing some public assets accurately, and have suggested the chancellor could pick a slightly less broad metric, or a more narrow definition still which excludes losses the Treasury incurs linked to the Bank of England.
Michael Saunders, a former member of the Bank’s monetary policy committee, said the latter was his “base case” for the budget, but that he did not rule out Reeves going further. “Such a change would open space for a modest rise in public spending on top of Labour’s manifesto plans,” he said.
One source said the Treasury would undertake its own modelling of different fiscal rules this week. A final decision will be made at the very latest by the week before the budget.
Some commentators have warned a significant departure from the existing rules could risk a negative reaction in financial markets.
However the International Monetary Fund has backed changes to fiscal rules to prioritise investment. Lord Jim O’Neill, the former chair of Goldman Sachs Asset Management, who has previously advised Reeves, also said markets would “celebrate” such changes.
Writing in a foreword to the IPPR report, he said: “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. It would also bring fiscal rules more in line with how financial markets think about fiscal sustainability.”
The Treasury was approached for comment.
