Chancellor Rachel Reeves has unveiled a significant change in the UK's fiscal policy framework, set to be included in the upcoming Budget announcement. The new plan introduces an "investment" debt rule that is expected to unlock more than £50 billion in borrowing capacity specifically designated for long-term capital investment projects. This shift is intended to strike a balance between freeing up funds for essential investments and ensuring fiscal responsibility to instill confidence in financial markets.
In contrast to the current fiscal rule that mandates a reduction in public sector debt over a five-year forecast period, the proposed change will center around public sector net financial liabilities (PSNFL) as a percentage of GDP. By accounting for government-held assets, this measure offers Chancellor Reeves an estimated additional headroom of £53 billion, as outlined by the Institute for Fiscal Studies. Reeves emphasized that the extra borrowing capacity would be strictly reserved for investment projects, ruling out its use for public sector pay or routine government expenditures. She reiterated that the aim is not to fund day-to-day spending or tax cuts but to focus on crucial areas like green energy, education, and infrastructure.
To maintain fiscal discipline, Reeves' new framework also includes a "stability rule" that requires the government to balance day-to-day spending with revenue within a five-year timeframe. By adopting this balanced approach, the UK aims to steer clear of a projected decline in public investment rates, which were set to decrease from 2.5% of GDP to 1.7% under previous plans. Despite the additional borrowing for investment projects, the government is expected to borrow up to £25 billion, leaving a buffer of over £30 billion to provide a safety net against economic uncertainties.
The market response to the fiscal policy shift has been relatively stable, with UK bond yields experiencing a slight increase as investors adjust to the anticipated changes in Treasury debt issuance. Analysts noted that UK bonds were "underperforming" compared to German and US bonds following the announcement. Chancellor Reeves confirmed support from the International Monetary Fund (IMF), highlighting the organization's recommendation to maintain investment spending levels. The IMF's backing of the decision is seen as crucial for aligning the UK with global investment trends and fostering economic growth. Additionally, Reeves expressed her view that this strategic adjustment marks a fundamental transformation in the UK's fiscal policy approach, aimed at securing long-term economic prosperity and reversing the country's declining investment trajectory.