Autumn Budget 2024: Chancellor confirms she will reform fiscal rules

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Households have seen costs grow higher under Labour than in the last year of the Conservative government.
Households have seen costs grow higher under Labour than in the last year of the Conservative government.

Rachel Reeves is set to change the fiscal rules in the Budget to enable tens of billions of additional investment over the course of the parliament.

Writing in the Financial Times, the Chancellor said that her ‘investment rule’ will “make space for increased investment in the fabric of our economy and ensure we don’t see the falls in public sector investment that were planned under the last government”.

“Sustainable growth does not come from short-termism,” she argued. “It comes from a responsible, long-term plan to invest in the future”.

The Institute for Fiscal Studies (IFS) has estimated that preventing investment falling as a share of GDP would require an additional £24bn in investment spending by the end of the parliament.

That’s because the previous government planned to freeze investment spending in cash terms, amounting to a significant real terms cut. Under Conservative plans, public investment would have fallen to 1.7 per cent of GDP by 2028/29, down from 2.4 per cent at the moment.

While Reeves did not provide details of her changes, reports suggest that the government will target public sector net financial liabilities (PSNFL) rather than government debt.

PSNFL includes the value of financial assets held by the government, such as student loans.

The change would give Reeves space to borrow an additional £50bn a year by the end of the decade, according to official forecasts made in March, though the government is very unlikely to use all of this extra fiscal headroom in one go.

Following reports of the reform this morning, the yield on UK government debt increased. This came amid falling yields elsewhere in the world, which might suggest that investors are nervous about the inflationary implications of an increase in investment.

While the investment rule will be reformed, Reeves confirmed that day-to-day spending will still be met by tax revenue.

“Alongside tough decisions on spending and welfare, that means taxes will need to rise to ensure this rule is met,” she said.