Rachel Reeves expects a £50bn windfall after fiscal rules are reformed

Rachel Reeves’ plans, which are being developed by officials, will allow her to free up up to £50 billion for roads, housing, and energy projects, as well as other large-scale initiatives. The chancellor asked Treasury to examine changing government borrowing rules, which would give her a windfall and fulfill Labour’s promise to increase investment in economy.

Economists have long criticised the current system for preventing governments from making long term investments that would grow the economy. The extra money can be used to fund road and other infrastructure projects Reeves, according to senior government sources, has asked officials to come up with options to change the way government measures debt. This could allow for the government to offset “assets”, such as the £236 Billion in student loan debts, against the overall national debt.

If such rules were in place when the last budget was prepared, it would have added about £50 billion to the headroom. This will not only fund a new £7 billion National Wealth Fund and the £8 Billion cost of Great British Energy, but it will also release billions of pounds for other infrastructure priorities like new rail and roads links and capital investments in the NHS.

The move won’t allow Reeves, however, to increase his daily spending. For example, by reinstating winter heating payments. Labour has promised that this will be funded entirely through annual tax receipts. Reeves will likely raise capital gains taxes and amend inheritance tax rules to help Labour meet its plans for increased spending.

Reeves was forced to reconsider another important Labour budget measure when warned her that her plan to clamp down on nondom tax benefits might not generate any money. Labour has said that it hopes to increase tax revenue by £1 billion per year by closing loopholes which allow wealthy individuals in the UK who live abroad to register for tax purposes.

The chancellor has now re-examined the policy that was designed to provide universal breakfast clubs in schools and more hospital appointments. Reeves was warned that the policy, as it is currently designed, could result in an exodus from non-doms, and even cost money to the government. Leading organisations, such as the International Monetary Fund, support changes to borrowing regulations that “allow public investment in an environment of high debt”

The Organisation for Economic Cooperation and Development (OECD) said this week that changing fiscal rules to a similar manner to what Reeves asked the Treasury to investigate “could increase the incentives for governments to invest in high-quality project”.

According to the current fiscal rules of the government, national debt must be decreasing as a percent of GDP over a five-year rolling period. The system is criticized by economists because it allows ministers to “game the system” and discourages long-term investment.

Treasury is examining the possibility of moving to a “public sector networth” system, which would calculate debt by comparing the value between government assets and liabilities. Currently, the government debt does no take assets into consideration. Reeves hopes the windfall allows Labour to fulfill their promise of building 1.5 million homes during this Parliament

A second option is to exclude certain liabilities from the calculation. It could be things like outstanding student loan debt and the government’s share in banks such as NatWest, which is currently viewed as a liability rather than an asset. Treasury officials insist no final decision has yet been made and that any additional borrowing will still require tax receipts to cover the debt interest payments.

The Office of Budget Responsibility, an independent government budget watchdog (OBR), would be consulted on any changes. Richard Hughes, current head of OBR, previously backed the creation of new fiscal rules in order to “incentivize prudent investment decisions” to help the UK address its long-term problems.

Reeves has stated that she is in favor of changing the rules. She told a fringe gathering at Labour’s Liverpool conference this week that “it’s important that we count both the assets and liabilities of public investments, not just their costs”. Isabel Stockton is a senior researcher economist at the Institute for Fiscal Studies. She said that they calculated the government could invest more if it used either of the new measures.

She said that if Rachel Reeves changed the system to one of net worth, or net liabilities, she would have a lot more room to invest than the fiscal rules currently in place. We calculate that, if these rules had been implemented for the budget of March, the headroom under both systems would have increased by approximately £50 billion. The fiscal situation will change in October, but this does give an indication of the impact.

Tom Railton, Director of the Invest in Britain Campaign Group, said that the current fiscal rule “focuses on too much the short-term costs of investment and does not recognise the substantial benefits of long-term investments”. Treasury spokesperson said: “The Budget will be built upon the rock of economic stability, including robust fiscal regulations that were laid out in the manifesto.” The current budget must be brought into balance so that the day-to-day expenses are covered by revenue, and the debt share in the economy will fall by the fifth.