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UK chancellor Rachel Reeves has paved the way for higher government capital spending, fuelling the debate over the future of her borrowing rules, declaring: “Growth is the challenge and investment is the solution.”
Reeves told the Labour party conference on Monday that her Budget would herald “an end to the low investment that feeds decline”, with government insiders confirming she wanted to ensure her fiscal rules did not block vital capital spending.
The chancellor, speaking in Liverpool, struck a more optimistic note on the future of the British economy after criticism that she had been too gloomy, as she insisted a Labour government would invest to grow the economy.
“It is time the Treasury moved on from just counting the costs of investment in our economy to recognising the benefits too,” she said. Aides said she wanted to change the culture inside the Treasury.
But a debate is now under way in the government on whether Reeves’s fiscal rules should be amended to allow more capital spending. She has said she will give more details in the Budget next month.
Labour has pledged to follow two key fiscal rules: to balance the current budget, which excludes investment, and to bring down government net debt as a share of GDP between the fourth and fifth year of its forecast.
Reeves’s decision to shift to the current budget rule, announced before the election, was explicitly meant to create fresh space for investment. But she remains heavily constrained by the debt rule.
In a letter to the Financial Times this month, economists including Lord Gus O’Donnell, a former cabinet secretary; Lord Jim O’Neill, a former Treasury minister under David Cameron; and Mariana Mazzucato, an economics professor at University College London, warned that the current debt rules were responsible for an “inbuilt bias” against investment.
Reeves signalled in her speech that she wanted to find ways of better measuring the benefits of investment in Treasury planning, creating space for greater public spending in roads, rail and green infrastructure.
This suggests the chancellor is interested in alternative measures of the public balance sheet’s strength.
One broader metric is public sector net worth, which looks at a wide array of government assets and which an IMF paper argued this year is “more conducive to public investment and economic growth” than a more traditional approach.
A spokesperson for Reeves said any change in such rules was “a matter for the Budget”.
Tom Railton, director of the Invest in Britain campaign, said the chancellor was right to say that cuts to public investment were a false economy that damage growth and undermine fiscal sustainability.
He added: “However, the government has inherited plans to cut public investment, driven by anti-investment fiscal rules that lock Britain into economic decline.”
Reeves’s speech, interrupted by a protest over Labour’s stance on the war against Gaza, was an attempt to reassure business and the party’s MPs that the chancellor has an optimistic vision for the future of the economy.
“I know you’re impatient for change and I am too,” she told her audience.
Earlier in the day, delegates had booed a decision to delay a non-binding vote in which the leadership faces possible defeat over its plans to means test winter fuel payments.
Reeves argued that Labour had to respond to what she characterised as a £22bn black hole left in its accounts by the previous Conservative government.
The chancellor added that October’s Budget would have “real ambition” and that there would be no return to austerity.
Several cabinet ministers, mayors and other senior Labour figures told the FT this weekend that the party leadership had been far too “gloomy” and “downbeat” in its first two months in power.
“This budget will be a budget for economic growth; it will be a budget for investment,” the chancellor said. “My ambition knows no limits, because I can see the prize on offer if we make the right choices now.”
In another remark highlighting the role of the state, she said: “Government cannot just get out of the way and leave markets to their own devices.”
The new administration could deliver “a Britain of opportunity, fairness and enterprise” despite the fiscal challenges it faced, she said.
Reeves announced an accelerated timeline on the party’s pledge to roll out free breakfast clubs to every primary school in the UK, saying it will start in hundreds of schools from April 2025, ahead of the national rollout. An extra £7mn would be spent on a “pilot project”.
This would mark “an investment so that, in years to come, we can proudly say that we left behind a Britain where the next generation has a chance to do better than those who came before it”, she said.
