Rachel Reeves announces a new debt rule aiming to unlock £50 billion for UK investment, ensuring fiscal discipline.
- The rule focuses on public sector net financial liabilities, allowing additional borrowing capacity for capital projects.
- The initiative emphasises investment in areas like green energy, education, and infrastructure while avoiding routine spending.
- Market reactions to the changes have been measured, with UK bond yields showing slight movement.
- Reeves stresses the importance of investment to combat the UK’s declining public investment rates.
Chancellor Rachel Reeves has introduced a debt rule set to release over £50 billion for capital investment in the UK, maintaining fiscal responsibility. This shift moves away from the current rule that mandates a reduction in public sector debt over five years, opting instead to focus on public sector net financial liabilities (PSNFL) as a percentage of GDP. This measure accounts for government-held assets, offering an estimated £53 billion in additional borrowing leeway according to the Institute for Fiscal Studies.
Reeves has clarified that this increased borrowing capacity is designated specifically for investment projects rather than daily expenditures or tax reductions. She committed to preserving significant fiscal headroom as a precaution against economic instability. Analysts anticipate government borrowing could reach up to £25 billion, leaving over £30 billion as a buffer, which will be channelled into initiatives such as green energy, education, and infrastructure. The strategy also includes a ‘stability rule’ to align everyday spending with revenue over five years, which Reeves argued would help reverse declining investment rates that were forecasted to fall from 2.5% to 1.7% of GDP over five years under earlier strategies.
Following the announcement, UK bond yields rose slightly as investors adapted to expected adjustments in the Treasury’s debt issuance, though the market response remained stable. Deutsche Bank’s UK chief economist, Sanjay Raja, observed UK bonds ‘underperforming’ compared to German and US bonds in light of the announcement, while Barclays’ Jack Meaning noted the relative stability in the market’s reaction to PSNFL’s adoption as a debt measure. The International Monetary Fund has expressed its support for Reeves’ decision, particularly as it aligns with recommendations to preserve investment spending. Reeves plans to brief IMF Managing Director Kristalina Georgieva on the approach, which aims to lay a foundation for growth and align the UK with global investment trends.
Reeves’ recalibration of fiscal policy reflects a broader ambition to shift the UK’s investment trajectory. She framed the Budget as a choice between ‘investment or decline,’ highlighting the necessity of sustained investment for the UK’s economic health. She contrasted Labour’s strategy with previous Conservative budgets that projected reductions in capital investment, advocating for a robust path toward growth.
Rachel Reeves’ new debt rule represents a pivotal shift in fiscal policy, focusing on long-term investment to secure the UK’s economic future.
