Changing fiscal rules could enable £50bn of extra borrowing for investment

ITV News Business and Economics Editor Joel Hills explains why Reeves' signal to change the fiscal rules in Labour's manifesto is both a risky and radical move

Fiscal rules are guidelines a government sets which regulate how much it can borrow and spend.

They are designed to give a broad sense that the government is in control of the things that matter, can be trusted to borrow money and should therefore pay the lowest interest rates.

In theory, the rules are binding. In practice, Chancellors sometimes revise them when it becomes inconvenient.

Yesterday, Rachel Reeves gave a clear signal that she is thinking of changing one of the fiscal rules in Labour’s manifesto - specifically, the pledge to get debt falling as a share of national income in five years - to increase public investment.

“It’s time that the Treasury moved on from just counting the costs of investments in our economy, to recognising the benefits too,” she told the conference.

Ben Zaranko, Senior Research Economist at the Institute for Fiscal Studies, calculates that if the chancellor decided to move from targeting Public Sector Net Debt to a broader measure of the government’s balance sheet, like Public Sector Net Worth, it could enable the Rachel Reeves to borrow an extra £50 billion a year for investment, without raising taxes

Raising public investment by this amount and holding it there would be a radical change, doubling the scheduled level of investment in the final year of this parliament.

“For a government seeking to invest more without a need to raise taxes, this has obvious attractions,” says Zaranko.

“But it has downsides too. These measures are complicated, hard to estimate, and not always helpful for thinking about whether the government's borrowing is sustainable.

For most of the last 50 years, both public investment (government spending on infrastructure like roads, railways, schools, and hospitals) and private investment (business spending to expand) have been very low in the UK relative to other countries.

Many economists will tell you this trend desperately needs to be reversed if we want to kickstart economic growth, if we want better living standards and if we want to generate the tax revenues necessary to improve public services.

As things stand, government investment is scheduled to fall as a share of national income over the course of this parliament.

And the fiscal rules Labour is currently committed to make it difficult to avoid these cuts.

Some have urged the government to amend and even ditch the fiscal rules, arguing there’s a need for much more boldness than was set out in the Labour manifesto.

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But tweaking the rules carries risk.

The changes may end up looking a lot like a broken manifesto promise. And a large increase in borrowing, at a time when the stock of national debt is at its highest level for 60 years may not go down well with investors, even if it is for a worthy cause.

The danger is that markets perceive the UK to be living permanently beyond its means.

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