Rachel Reeves, at the International Monetary Fund will announce a plan for changing Britain’s debt regulations that will allow the government to spend an additional £50bn on infrastructure projects.
After weeks’ worth of speculation the chancellor confirmed at the Fund’s annual meetings on Thursday in Washington that the budget next week will include a method for assessing UK debt – an action that will allow the Treasury to borrow for long-term investment.
IMF will welcome the change in the debt rule. The IMF says that spending on UK infrastructure should be ring-fenced, as the government tries to repair damage caused to public finances by the pandemic.
Reeves won’t specify which of the debt measures being considered has been selected while in Washington. It has been informed by a senior source within the government that she will be targeting net financial liabilities for public sector.
This new yardstick, which replaces the public sector net debt, will include all of the government’s financial assets, liabilities, and student loans, equity stakes in private businesses, and funded pension schemes.
The chancellor would have more borrowing room for long-term infrastructure.
Reeves stated before departing for the IMF, on Wednesday: “A Britain that is built on the rock-solid foundation of economic stability will be a Britain which is a credible and strong international partner.
“I will be in Washington telling the world that the upcoming budget is a reset of our economy, as we invest the foundations for future growth.
From this solid foundation, we can best represent British interest and demonstrate leadership in major issues such as the conflicts in the Middle East or Ukraine.
Labour inherited a fiscal rule set from Reeves’ predecessor, Jeremy Hunt. This dictated that daily spending must be covered by revenue and that the debt share in the economy should be declining by the fifth year according to forecasts made by the Office for Budget Responsibility.
Hunt barely met his debt target, only by £8.9bn. This was despite the fact that he announced large tax reductions despite spending pressures due to Britain’s high costs of debt servicing, a ballooning demand for public services, and weak economic growth.
If Hunt had adopted a PSNFL goal in March, he would have been able to borrow an additional £53bn.
The Treasury hinted it wouldn’t initially use all of the additional scope provided by a change in the debt rule and will put “guardrails” in place so that investment projects are worth the money. The budget for 30 October will be heavily focused on energy and transportation projects.
Sources said that Reeves would not adopt the most radical rule by adopting the Public Sector Net Worth (PSNW), which includes non-financial items such as roads, schools, and hospitals.
In the budget, the chancellor will state that the main rule of the government will be to cover day-to-day expenditures with tax revenues and only use borrowing for capital expenses. According to the Treasury, this could mean spending cuts and tax increases of up £50bn.
The announcement of the IMF changes will show that the chancellor wants to keep a conservative organization on board while also trying to gain the support of the most powerful central bankers and finance ministers in the world.
The effort to minimize any financial market reaction to a change to fiscal rules is in stark contrast with the approach taken by Liz Truss who was challenged directly by the fund over her mini-budget for 2022.
Sources in government said Reeves, who was in Washington at the time, would give her reasons for wanting to change the debt rule, but full details will be included in the budget.
Vitor Gaspar of the IMF fiscal affairs department spoke at a recent press conference in celebration of the publication of Fiscal Monitor. He said that, “As with many other advanced economies around the world, the UK’s public investment as a proportion of GDP is on the decline.”
Public investment is needed to meet the challenges associated with energy transition, new technology, technological innovation, and many other things.
The Fiscal Monitor stresses that public investments should be protected through budgetary procedures which foster good macroeconomic performance. It is a very welcome development that this issue is at the forefront of the UK debate right now.
In recent years, the IMF has shifted its position to favor government borrowings for investments in certain circumstances.
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