Chancellor Rachel Reeves has announced a major shift in the UK’s fiscal policy framework, confirming plans to introduce a new rule for “investment” debt in next week’s Budget.
This change is expected to free up more than £50 billion of borrowing capacity, allocated for long-term capital investment projects, while maintaining fiscal discipline to reassure financial markets.
Under the current fiscal rule, the government must reduce public sector debt over a projected five-year period. However, the new rule will focus on public sector net financial liabilities (PSNFL) as a proportion of GDP, a measure that takes into account assets held by the government and provides Reeves with an estimated £53bn of additional headroom, according to the Institute of Public Finance. studies.
– Focused investment without compromising financial stability
Reeves stressed that the additional borrowing would be allocated strictly to investment projects, and not to public sector salaries or routine government expenditures. “This investment is not intended to pay for daily spending or tax breaks,” she said, pledging to maintain a large financial margin as a buffer against economic fluctuations. Analysts expect the government to borrow up to £25bn, leaving more than £30bn in buffers, even as the money is directed towards projects such as green energy, education and infrastructure.
To maintain discipline, Reeves’ new framework includes a “stability rule” that obliges the government to balance daily spending with revenues within a five-year period. Reeves believes this balanced approach will allow the UK to move away from low public investment rates, which were expected to fall from 2.5% of GDP to 1.7% over the next five years under previous plans.
Market reaction and support from the IMF
Following this announcement, UK bond yields rose slightly as investors adjusted to expected changes in Treasury debt issuance, although the market response remained muted. Deutsche Bank’s UK chief economist, Sanjay Raja, noted that UK bonds had “underperformed” against German and US bonds in response to this news, while Barclays’ Jack Minnen highlighted the relative stability in the market’s reaction to the switch to PSNFL. As a measure of debt.
Reeves confirmed that the International Monetary Fund supports the decision, especially in light of its recommendation for the United Kingdom to avoid cuts in investment spending. Later on Thursday, Reeves will brief IMF Director Kristalina Georgieva on her plans, with the approach expected to provide a basis for growth and help the UK keep pace with global investment trends.
A strategic hub to enhance growth in the United Kingdom
The debt base adjustment reflects Reeves’ broader ambition to reverse declining investment in the UK, framing the budget as a choice between “invest or decline”. She said maintaining investment levels was essential to the UK’s long-term economic health, contrasting Labour’s plan with previous Conservative budgets that predicted shrinking capital investment.
“This is about ensuring a path towards growth rather than decline,” Reeves said, stressing that the shift represents a fundamental recalibration of the UK’s approach to fiscal policy, with the aim of securing its economic future.
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