Rachel Reeves is considering rewriting Britain’s debt rules in a move that could free up to £50bn of spending in her maiden Budget.
The Chancellor is understood to be considering changing how debt is calculated to take into account investment spending, as she gave the clearest signal yet that she wanted to relax the rules.
Speaking at an event hosted by the Institute for Public Policy Research (IPPR) at the Labour Party Conference, Ms Reeves said: “We will set out the details of the fiscal rules at the Budget. But as I said, it is important that we count the benefits of public investment and not just the costs of it.
“Other countries look at assets as well as liabilities and so we are looking at all of those things.
“We’ve got challenges around the day-to-day pressures in all our public services. But if we put off investment decisions, it makes the next spending review and the next Budget even harder if you’ve choked off those things that could actually unlock the investment that can help grow the economy.”
Ms Reeves has two self-imposed borrowing goals.
The first allows her to borrow for investment as long as she brings day-to-day spending back into balance within five years. The second rule states that she must get debt falling after five years.
While Ms Reeves has vowed to stick to the second goal, it is understood that she is considering switching the debt measure away from rules that only take into account the spending implications of investment. It would also strip out the impact of rising student debt.
The measure – known as public sector net financial liabilities – is already forecast by the Office for Budget Responsibility (OBR) in its twice-yearly assessment of the public finances.
In March, its forecasts showed that targeting this measure would see debt as a share of GDP fall every year to 78.7pc in 2028-29, from 80.6pc in 2027-28, or more than £50bn in cash terms.
This compares with predecessor Jeremy Hunt’s headroom of just £8.9bn under the existing rules, which see debt falling only marginally from 93.2pc of GDP to 92.9pc in 2028-29.
Switching to this measure would also allow Ms Reeves to borrow £7.3bn for her National Wealth Fund.
The move has already been advocated by the influential Tony Blair Institute (TBI), which is expected to renew its call for a rewriting of the fiscal rules ahead of the Budget.
While both France and Germany exclude state-owned investment from their debt metrics, which is also considered standard practice by the International Monetary Fund, a Whitehall source said the measure was one of the options on the table but added it was far from a “done deal”.
Others stressed that a rewriting of the rules would not give her a “blank cheque” for public spending as she would still be constrained heavily by a pledge to balance the books in terms of day-to-day spending.
The Institute for Fiscal Studies has previously calculated that her goal of balancing the so-called current budget was only met by £13.9bn based on the OBR’s previous forecast in March.
“That’s still going to end up being a constraint,” a source said.
Ms Reeves has already warned of “tough decisions” to fill what she claims is a £22bn black hole inherited from the Tories.
Speaking on Tuesday, she said: “With the fiscal rules to balance day-to-day expenditure with tax receipts […] is hard to do especially with the inheritance that we have.
“We’ll stick with that rule and we will bring debt down as a share of our economy.”
The £50bn debt headroom would be less if Ms Reeves chooses to exclude the Bank of England’s money printing and loan programmes from the measure, as the current rules do.
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