Chancellor Rachel Reeves has left the door open to amending a key measure on the UK’s debt, a move that could free up £17bn for her budget next autumn.
During a trip to New York and Toronto, Reeves indicated she would clarify her fiscal rules in her first budget, amid speculation the government might adjust the debt-to-GDP ratio to exclude losses from the Bank of England’s bond-buying programme.
Reiterating her commitment to the Labour government’s fiscal discipline, Reeves stressed that the target of reducing the debt-to-GDP ratio over a five-year period remained unchanged. However, excluding the Bank’s QE losses from this measure would free up significant fiscal space. Last year, the Treasury had to transfer £45bn to the Bank of England to cover these losses.
“We will reduce debt as a share of GDP. More importantly, we will balance tax revenues with day-to-day spending. But we will work out the specifics of that at the time of the budget,” Reeves said, stressing that her fiscal rules are “non-negotiable.”
The potential amendment comes as the government seeks ways to meet debt targets without raising income tax, VAT or national insurance, especially after Reeves revealed a £22bn funding gap in this year’s inherited spending plans.
Analysts and investors have largely agreed that the market will not punish the government for such a change, even if it will only provide a one-off benefit to the financial accounts. Michael Saunders, a former Bank of England rate-setter, has suggested that the impact of changing the debt measure will be “temporary and will wear off… probably after the five-year period set by the Office for Budget Responsibility.”
Reeves is in New York for meetings with Robert Vince, chairman of the Bank of New York Mellon, and will meet with top US business leaders and investors on Wall Street on Tuesday as part of a roadshow ahead of Labour’s international investment summit in October. She will also meet Mark Carney, the former governor of the Bank of England, in Toronto on Wednesday.