(Bloomberg) -- Chancellor of the Exchequer Rachel Reeves hinted at plans that could unlock billions of pounds of investment in the climate transition and other government priorities as she promised to deliver a UK budget showing “real ambition.”
“This budget will be a budget for economic growth; it will be a budget for investment,” Reeves said Monday at the Labour Party’s annual conference in Liverpool on Monday. “It is time that the Treasury moved on from just counting the costs of investments, to recognizing the benefits too.”
While Reeves didn’t elaborate on how that will work in practice, a person familiar with the matter said the chancellor is considering plans to move Labour’s new institutions, the National Wealth Fund and GB Energy, off the government’s books — a change in accounting treatment that Andy King, a former senior official at the Office for Budget Responsibility, has said could give her £15 billion ($20 billion) more headroom for borrowing.
Reeves — who was interrupted during her speech by a heckler — is trying to get to grips with the £22 billion fiscal hole she says the previous Tory administration left her, while also delivering the investment-led growth promised by Labour in this year’s election campaign. Speaking a day before Prime Minister Keir Starmer is due to address the conference, she used her intervention to project a more positive vision for Britain after spending most of her 11 weeks in office warning of the dire state of the public finances.
The extra borrowing potential freed up by changing the treatment of investments could come on top of the estimated £16 billion of additional fiscal space Reeves would get by switching the current measure of debt within her rules, a proposal the Treasury is not ruling out. The combined £31 billion of potential additional borrowing would be part of a new fiscal framework designed to meet Labour’s manifesto promise of providing financial stability and growth investment.
In an effort to find more cash to fund Labour’s priorities, the chancellor is widely expected to announce tax increases in her budget on Oct. 30. On Monday morning, she ruled out a wealth tax in a BBC radio interview, and also promised she wouldn’t squeeze public spending as the Tories did.
“There will be no return to austerity,” she said in her speech, after earlier telling the BBC that there will be “real terms increases to government spending in this Parliament.” She said budgets for individual departments will be “negotiated” — suggesting some areas may lose out.
Reeves needs every penny she can find to be able to increase spending on Britain’s ailing public services, generate growth and cover about £9 billion of public sector pay rises she awarded after following the recommendations of independent pay review bodies. She is currently constrained by her rule that says debt must be falling as a share of GDP in five years’ time.
Labour has created GB Energy and the NWF to “crowd in” private capital for investment in green infrastructure and technology, but the Treasury’s current accounting rules place even private debt raised independently by the corporations on the government’s balance sheet.
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That means the government must compete with public corporations. Both France and Germany exclude their state-owned investment and development banks from the debt metric. As a result, France and Germany are able to borrow and invest more.
A different debt measure, public sector net financial liabilities, is being looked at as an alternative to the current public sector net debt fiscal rule. PSNFL counts both the assets and the liabilities created by the policy banks, which effectively removes them from the books. The International Monetary Fund also uses a broader definition of net debt that captures the assets.
“The government’s robust fiscal rules were set out in the manifesto and more detail will be provided at the budget,” a Treasury spokesperson said.
In a policy-light speech, Reeves promised to set out plans for a new industrial strategy alongside Business Secretary Jonathan Reynolds next month. She also said she will appoint a Covid commissioner to investigate £674 million of pandemic-era contracts that are “in dispute.”
“That money belongs in our police, it belongs in our health service, and it belongs in our schools,” Reeves said. “We want that money back.”
In a setback for the chancellor, just as she spoke about the “meaningful, real terms pay rise” she’d awarded workers, the Royal College of Nursing said nurses had voted to reject their deal.
Reeves’ speech was also interrupted by pro-Palestine protesters. One activist stood up, unveiled a banner and shouted that Britain should stop arming Israel, before being bundled out by security guards. Reeves retorted “this is a changed Labour Party, a Labour Party that represents working people, not a party of protest.”
Reeves has also faced resistance from some business leaders over the prospect of tax hikes. They say that would hamper the economic growth Reeves says she wants to encourage. The finance minister argues that fixing the public finances is a precondition for encouraging investment.
Nevertheless, Britain’s major business groups broadly welcomed her speech. Stephen Phipson, chief executive of manufacturing lobby group Make UK, said the promise of a new industrial strategy was a “vital piece in the jigsaw of future economic growth” and would “pull the levers of both domestic and international investment.”
Confederation of British Industry Chief Executive Officer Rain Newton-Smith said Reeves “hit the right notes” and had an “optimistic pitch to investors” about the strengths of the UK economy. The British Chambers of Commerce also said the Chancellor’s speech was encouraging, but cautioned that businesses still want to know where any increases in the tax burden might fall.
The chancellor is also trying to regain the initiative after a backlash against her decision to remove winter fuel payments from about 10 million pensioners, and as the wider Labour administration battles negative headlines over accepting freebies and in-fighting among Starmer’s top team.
“I know that not everyone in this hall or the country will agree with every decision I make, but I will not duck those decisions,” Reeves said. “We must have no complacency, a relentless focus on the priorities of the British people, an iron discipline.”
--With assistance from Alex Wickham.
(Updates with Starmer speech in fourth paragraph. A previous version of this story was corrected to change the spelling of Office for Budget Responsibility in the third paragraph.)
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