Reeves confirms change to debt rule and warns of higher taxes as Budget looms

The Chancellor said she faced difficult choices but insisted her Budget would "begin to fix the NHS and start to rebuild our economy".

The cost of Government borrowing increased in response to speculation the Chancellor would change debt rules to spend billions more on investments.

Tory former chancellor Jeremy Hunt said increased borrowing could increase the cost of mortgages for hundreds of thousands of households.

But SNP Finance Secretary Shona Robison welcomed the move and said she hoped it would mean more funding for the Scottish Government in next month’s Budget.

During a round of broadcast interviews while attending the International Monetary Fund meeting in Washington DC, Ms Reeves confirmed a technical change in the way she would measure progress against the target of managing debt.

Writing in the Financial Times, Ms Reeves said her fiscal rules would be "the rock of stability at the core of my Budget".

Labour's 2024 election manifesto said Ms Reeves would follow two rules: The current budget would be in balance so that day-to-day costs are met by revenues.

The second rule is that debt must be falling as a share of the economy by the fifth year of the economic forecast.

On Thursday she confirmed that the way debt is measured as part of that target would be changed to allow greater flexibility.

Ms Reeves said: "My fiscal rules will do two things. The first and most important: my stability rule will mean that day-to-day spending will be matched by revenues.

"Given the state of the public finances and the need to invest in our public services, this rule will bite hardest.

"Alongside tough decisions on spending and welfare, that means taxes will need to rise to ensure this rule is met. I will always protect working people when I make these choices, while taking a balanced approach.

"Crucially, my stability rule will also cover the interest on our national debt and unlike the previous government I won't cut capital budgets to make up for shortfalls in the day-to-day running costs of departments.

"My second fiscal rule, the investment rule, will get debt falling as a proportion of our economy.

"That 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."

She told ITV News: "Our second rule, our investment rule, will change the way in which we measure government debt so we take into account our assets not just the costs of investment."

She is expected to target public sector net financial liabilities (PSNFL) as her new benchmark for government debt rather than the current measure of underlying public sector net debt.

A shift to PSNFL would give her greater headroom to meet her debt reduction target, because it includes a wider mix of state assets and liabilities - notably including expected student loan repayments to offset some of the liability.

Had PSNFL been used as the debt target in the March 2024 budget, the "headroom" - the margin by which the fiscal rule is met - would have increased by £53 billion according to the Institute for Fiscal Studies.

She told ITV: "What I hope that people will see in the Budget next week is that I'm a responsible Chancellor being honest and transparent about the situation with the public finances and indeed the trajectory for public services, but that - in that situation and the difficult choices - that we've done everything in our power to protect working people, to begin to fix the NHS and to start to rebuild our economy and fix the foundations of our economy."

Ms Reeves told the BBC that having oversight from National Audit Office and the Office for Budget Responsibility would "give markets confidence that there are rules around the investments we can make as a country".

But the Chancellor said she would put in guardrails as she changes the country's debt rule to "give markets confidence that there are rules around the investments we can make as a country".

She also indicated she will confirm a tighter rule on spending on welfare, in Government departments, and on debt interest.

"(That) rule is the one that really binds and it's hard to meet, and that will require difficult decisions on spending, welfare and taxation, but there's a choice then about whether we want to continue on this path to decline," she told the BBC.

"If we continued on that path we would miss out on other opportunities and other countries would seize them."

She added: "We will be putting in guardrails with the National Audit Office and Office for Budget Responsibility validating the investments that we're making to ensure that we deliver value for money... and to give markets confidence that there are rules around the investments we can make as a country."

Shadow chancellor Mr Hunt said: "The consistent advice I received from Treasury officials was always that increasing borrowing meant interest rates would be higher for longer - and punish families with mortgages.

"What's even more remarkable is that the Chancellor hasn't seen fit to announce this major change to the fiscal rules to Parliament.

"The markets are watching."

The prospect of tens of billions in extra state borrowing sent gilt yields up by as much as eight basis points on Thursday.

It is thought this could see the Bank of England rein in cuts to interest rates, impacting UK gilts by sending prices lower, which conversely causes its yield to rise.

Gilts were also said to be under pressure after Bank governor Andrew Bailey said on Wednesday that there were still questions over whether elements of inflation may remain stubborn in the economy.

Liberal Democrat Treasury spokeswoman Daisy Cooper said: "The Chancellor must invest any extra borrowing wisely and that should start by fixing the previous Conservative government's legacy of crumbling hospitals and GP practices that plague our communities."

Ms Reeves's confirmation that taxes will rise to meet her day-to-day spending needs came as Sir Keir Starmer insisted there was no reason for entrepreneurs to quit the UK.

With speculation the Government could raise capital gains tax, putting off business start-ups and foreign investors alike, Sir Keir played down concerns about the Budget's impact.

Asked if he thinks entrepreneurs may want to leave the UK following the reported tax increases, Sir Keir told reporters: "There is no reason for them to."

The Scottish Government’s Finance Secretary Shona Robison said: “We have been calling for the Chancellor to amend her fiscal rules, and any changes that allow for greater investment are welcome.

“Public infrastructure is crying out for renewal and investment. With these new rules in place I call upon the Chancellor to waste no time and ensure next week’s Budget not only reverses the cuts to Scotland’s capital funding, but significantly enhances it. This will enable us to invest more in infrastructure to support economic growth and net zero, and support our action to tackle child poverty.

“We await next week’s budget to see if Scotland will finally receive the funding it deserves to protect and improve public services.”