UK’s Reeves to change debt target to boost public investment

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By David Milliken

WASHINGTON (Reuters) -British finance minister Rachel Reeves will change the measure of public debt that the government targets in next week’s budget to allow billions of pounds of more borrowing for investment, she said on Thursday.

Reeves – whose Labour Party won a sweeping election victory in July – said she wanted to reverse cuts to public investment planned by the previous Conservative government when she presents her first budget statement on Oct. 30.

“I can confirm today that we will be changing the way that we measure debt in the budget statement next week, but I’ll set out the details of that to parliament,” Reeves told reporters in Washington where she is attending annual meetings of the International Monetary Fund and World Bank.

“We will get debt falling as a share of our economy during this parliament, but the changes that we will make to the investment rule will free up money to invest in things that will deliver a long term return,” she added.

The statement is the latest in a series of indications from Reeves about how she wants more flexibility to borrow to finance investment within the government’s budget rules, but with appropriate guard rails to avoid spooking markets.

Reeves declined to say what measure would replace the current target of public sector net debt excluding the Bank of England, which was introduced in 2022.

On Wednesday the Guardian newspaper reported that Reeves would target public sector net financial liabilities, which allow assets such as student loans to be offset against public debt.

Economists estimate that had this measure been in place in March, it would have created scope for more than 50 billion pounds ($65 billion) of extra borrowing, equivalent to about 1.5% of Britain’s annual economic output.

Reeves said she would not seek to use all the headroom created by the change.

DEBT COSTS RISE

However, British government bonds underperformed against German and U.S. debt on Thursday on speculation about a change in the budget rules, with the yield premium for 10-year gilts over Bunds increasing by 8 basis points.

Conservative former finance minister Jeremy Hunt – whose party suffered a heavy defeat to Labour in July – said on X that “markets were watching” Reeves’ plans.

“The consistent advice I received from Treasury officials was always that increasing borrowing meant interest rates would be higher for longer,” he said.

Asked what her message was to investors, Reeves said she was committed to borrow only for long-term investment.

“It’s not to pay for day-to-day spending. It’s not to pay for tax giveaways. It’s to invest in things to get a long-term return for our country and for taxpayers,” she said.

“We will get debt down as a share of the economy,” she added.

Earlier this week, the IMF stressed the importance of Britain and other countries lowering debt, which it defines differently.

On Thursday the IMF’s deputy director for Europe, Helge Berger, said the Fund would want to study the detail of Reeves’ changes before passing judgement.

Britain would need a “notable fiscal effort” to stop debt rising overall, but some borrowing for investment could be appropriate, he said.

Government sources said last week that Reeves would need to raise around 40 billion pounds – mostly through higher taxes but also through some spending curbs – to balance day-to-day spending with revenues and allow increased spending on priorities such as healthcare.

If Reeves’ new rule requires debt to fall by the next election due in 2029, that would represent a tighter requirement than current rules based on rolling five-year periods which allow deadlines to be pushed back each year.

Before the election, Reeves had already said that she would change one leg of the fiscal rules which allowed a 3% budget deficit, including investment spending. Instead she said she would target a balanced budget excluding public investment.

The previous government’s plans envisaged public sector net investment falling to 1.7% of GDP from 2.4% over the next five years.

“If we continued on that path, we would be embracing a path of decline, and it’s not a path that I want for Britain,” Reeves said.

Stopping that decline would cost around 24 billion pounds a year by 2028/29, the Institute for Fiscal Studies think tank has estimated.

($1 = 0.7715 pounds)

(Reporting by David Milliken; editing by William James and Andrew Heavens)