Chancellor’s Rule Change Could Enable Billions in Budget Investment

Chancellor Rachel Reeves plans to modify the measurement used for her debt targets, a move that could potentially free up around £50 billion for investments. By adjusting how debt is calculated, she aims to finance new projects without solely relying on cuts or tax increases ahead of the October 30 Budget. Here’s a closer look at her proposed fiscal rule changes and their implications.

What Exactly Are Fiscal Rules?
Since Gordon Brown introduced them in 1997, fiscal rules have served as a commitment by chancellors to responsibly manage government borrowing and reassure both markets and the public. According to Labour’s 2024 manifesto, Reeves’ fiscal rules include balancing the current budget—ensuring day-to-day expenses are covered by revenue—and reducing debt as a share of the economy within five years. Although her targets appear similar to those of her predecessor Jeremy Hunt, Reeves proposes redefining the term “debt” to allow greater investment flexibility.

Isn’t Debt Just Debt?
Not quite. Presently, the favoured definition is “public sector net debt excluding the Bank of England” (PSND ex BoE), which weighs government assets like foreign exchange reserves against state liabilities such as bonds. Reeves, however, is reportedly inclined to switch to “public sector net financial liabilities” (PSNFL), colloquially dubbed “persnuffle” by economists. Unlike PSND, PSNFL considers a wider range of assets and liabilities, including anticipated student loan repayments as assets and other less liquid assets like funded public sector pensions.

How Could This Impact the Budget?
The effect could be substantial. If PSNFL had been employed during the March 2024 Budget, the fiscal “headroom” Reeves would have had to meet debt targets could have increased by £53 billion. However, this does not translate into a spending spree; Reeves would still need to maintain a safety margin to preserve fiscal prudence, likely exceeding what Hunt allocated in his own pre-election budget.

Are There Risks?
Borrowing remains borrowing, despite how it is categorised, and places a burden on future taxpayers rather than the present. An increase in borrowing of this magnitude could heighten pressure on interest rates. Treasury analysis in 2023 estimated that increasing borrowing by 1% of GDP could drive rates up by 0.5 to 1.25 percentage points.

How Will the Change Be Received?
Reeves’ adjustment is likely to prompt accusations of financial manipulation. Critics, including former Prime Minister Rishi Sunak, have cited Reeves’ own prior warnings against “fiddling the figures” as evidence of potential hypocrisy. This debate underscores the challenges and stakes involved in redefining fiscal measures while balancing investment ambitions and debt management.