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Chancellor Rachel Reeves has announced a significant shift in the UK’s fiscal policy framework, confirming plans to introduce a new “investment” debt rule in next week’s Budget.
This change is expected to free up more than £50 billion of borrowing capacity for long-term investment projects, while maintaining fiscal discipline to reassure financial markets.
According to the current budget rule, the government must reduce public sector debt over a period of five years. However, the new rule will focus on public sector net financial liabilities (PSNFL) as a percentage of GDP, a measure that takes into account government assets and provides Reeves an estimated £53 billion of additional headroom, according to the Institute for Fiscal. Studies.
Targeted investments without endangering budget stability
Reeves underlined that the additional loans would be strictly reserved for capital projects, and not for public sector salaries or routine government expenditure. “This investment is not intended to pay for day-to-day expenses or tax benefits,” she stated, pledging to maintain significant fiscal space as a buffer against economic volatility. Analysts expect the government to borrow up to £25 billion, leaving more than £30 billion as a cushion, even as it spends on projects such as green energy, education and infrastructure.
To maintain discipline, Reeves’ new framework includes a “stability rule” that requires the government to balance daily spending with revenue within a five-year period. This balanced approach, Reeves argued, will allow Britain to break free from falling public investment, which under previous plans was expected to fall from 2.5% of GDP to 1.7% over the next five years.
Market reaction and IMF support
Following the announcement, UK bond yields rose slightly as investors adjusted to expected changes in government bond issuance, although market reaction remained muted. Deutsche Bank’s UK chief economist Sanjay Raja noted that UK bonds “underperformed” against German and US bonds in response to the news, while Barclays’ Jack Meaning highlighted the relative stability in the market reaction to the shift to PSNFL as debt measure.
Reeves confirmed that the International Monetary Fund (IMF) supports the decision, especially given its recommendation for Britain to avoid cuts in investment spending. Later on Thursday, Reeves will brief IMF Managing Director Kristalina Georgieva on her plans, expecting the approach to lay a foundation for growth and help Britain keep pace with global investment trends.
A strategic pivot to boost British growth
The debt rule adjustment reflects Reeves’ wider ambition to reverse Britain’s downward investment trend, with the budget presented as a choice between ‘investment or decline’. She argued that maintaining investment levels is essential for Britain’s long-term economic health, in contrast to Labour’s plan with previous Tory budgets that predicted shrinking capital investment.
“This is about securing a path to growth rather than decline,” Reeves said, emphasizing that the shift represents a fundamental recalibration of the UK’s approach to fiscal policy, aimed at securing its economic future.