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The UK Chancellor, Rachel Reeves, is facing the task of finding £22bn to cover the deficit in the public purse while also pledging to end austerity and invest in vital areas such as hospitals and roads. One way in which Reeves could achieve this involves the government’s borrowing limits, which play a central role in maintaining credibility with financial markets and taxpayers. The UK has maintained a fiscal rule of reducing debt in five years and Reeves has said she will broadly replicate the rules of her predecessor, Jeremy Hunt. However, Reeves has another set of rules she is committed to – that the government will fund all day-to-day spending with tax revenue. Any additional investment spending will therefore need to be funded by borrowing.
Despite the pressure to borrow more, Reeves remains committed to appearing prudent, with the Chancellor reassuring markets that she won’t overspend. Similarly, £1 in every £12 paid by the government is dedicated to paying interest on existing debt, so Reeves’s ability to borrow more could be limited by these high interest rates. Additionally, even though there is an expectation of higher borrowing, it’s believed that investor appetite for the UK could still be high, which would help to limit costs.
To increase the money available for investment, Reeves is expected to make changes to the definition of debt. But there are many options available, one of which is to account for the operations of the Bank of England, which incurred losses during the pandemic, differently to adjust the measurement of the national debt. Another option is to consider public sector net worth, which can include infrastructure and other elements that are often left out of debt calculations.
Despite Reeves’s best efforts to balance the books, alleviating squeezed budgets for public services will still likely mean the need for tax rises. The Institute for Fiscal Studies has predicted that taxes could be raised by up to £25bn, with Labour hoping to raise £9bn from measures included in its manifesto. It seems that despite the expected changes to the rules, many British taxpayers could still find themselves in a state of uncertainty. All will be revealed on 30th October, when Reeves delivers her Budget
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