Reeves will change debt rules to free up £50bn in borrowing

The chancellor has confirmed she will introduce a new “investment” debt rule at her maiden budget on October 30, a decision that will free up more than £50 billion in borrowing space to fund long-term capital spending projects.
Yet Rachel Reeves will bank tens of billions of pounds in headroom at the budget to reassure financial markets that the government will not be borrowing to “fund tax giveaways” after changing its fiscal rules.
Speculation around the debt rule change triggered a small climb in the government borrowing costs on Thursday, with investors fearing an increase in Treasury debt issuance drive down the value of gilts. The yield on benchmark ten-year bonds inched up by 1 basis point to 4.21 per cent, while the pound rose by 0.3 per cent against the dollar to $1.29.
Speaking at the sidelines of the annual meeting of the International Monetary Fund (IMF), Reeves said: “I can confirm that we will be changing the way that we measure debt in the budget statement next week. We will get debt falling as a share of our economy during this parliament but the changes that we will make to the investment rule will free up money to invest in things that deliver a long-term return for our country and for our taxpayers.”
Treasury sources said the chancellor would target a measure of public sector net financial liabilities as a percentage of GDP as her new fiscal rule — a shift that would free up £53 billion for Reeves, according to estimates from the Institute for Fiscal Studies. The current debt rule requires the government to reduce public sector debt in the fifth year of forecasts produced by the Office for Budget Responsibility.
The new rule would be governed by strict “guardrails”, the chancellor said, and the additional borrowing would not be used to fund public sector pay deals or the day-to-day functioning of government. Reeves said she would “not be using all the headroom available” and the government would maintain a “substantial” fiscal buffer to keep debt falling within the next five years and reassure investors. Analysts have speculated that the government will borrow up to £25 billion to maintain more than £30 billion in headroom.
The government will also be bound by a “stability rule” that aims to balance day-to-day spending with revenue to pay over the course of the five-year parliament. “I hope that what markets see next week is the very tough rule that is a real constraint on spending. This investment is not to pay for day-to-day spending or on tax giveaways,” Reeves said.
The change will allow the government to borrow to spend on investment projects such as clean energy technologies, education and physical infrastructure.
Sanjay Raja, chief UK economist at Deutsche Bank, said UK bond yields were “underperforming” relative to peers in Germany and the US as traders digested news about the debt change.
Jack Meaning, Barclays’ UK chief economist, added: “The market reaction to the news of the move to a debt rule anchored by the PSNFL has been relatively calm.”
Reeves said the change has been welcomed by the IMF, which this week urged the government not to cut spending on investment as it seeks to balance the books. The chancellor will inform Kristalina Georgieva, the IMF managing director, of her plans later on Thursday.
The chancellor has said she wants to reverse the pattern of falling investment spending, with the current capital spending on course to decline from 2.5 per cent of GDP to 1.7 per cent over the next five years, based on Tory spending plans.
“If we continued on that path, we would be embracing a path of decline,” Reeves said. “The real debate now in British politics is whether you are on the side of investment or on the side of decline. I don’t want to see public sector net investment as a share of our economy decline in a way that is currently set out. Under our current fiscal rules, we would not be able to reverse that path.”