Chancellor Rachel Reeves has restructured the policy around public sector debt, freeing up an estimated £50bn for spending on investment projects.
The new regulation will reduce public sector net financial liabilities, or net financial debt, as a percentage of GDP.
“Net financial debt recognizes that government investment delivers returns for taxpayers by counting not just the liabilities on a government’s balance sheet, but the financial assets too,” Reeves said.
Under the current system, public investment rates were projected to drop from 2.5% of current GDP to 1.7% in five years time. The new system will use the stability rule, with the government only borrowing for investment, and the investment rule, which reduces net financial debt as a proportion to GDP.
This is the last year that the fiscal rules will target the fifth and final year of the forecast,” the budget stated.
“The rules must be met by 2029-30 at this Budget, and until 2029-30 becomes the third year of the forecast, at which point both rules will target the third year of the rolling forecast period.”
Capital spending will include four key ‘guardrails’, including a rate of return that is at least as large of that on gilts, strengthening institutions to improve infrastructure delivery, set capital budgets at every five years, and ensuring greater transparency through annual reports.
“These fiscal rules will ensure that our public finances are on a firm footing while enabling us to invest prudently alongside business,” Reeves said.
Reeves ensured that the funds freed up by this policy change would explicitly go towards investment projects, rather than public sector pay or routine government expenses. By the end of September, public sector net debt amounted to 98.5% of the nation’s GDP, and outpaced the Office for Budget Responsibility’s monthly borrowing estimate by £1.5bn.
“The only way to drive economic growth is to invest, invest, invest,” Reeves said in her speech.
Adrian Gosden, UK equities fund manager at Jupiter Asset Management, added: “UK Chancellor Rachel Reeves has delivered a tough but fair budget, much of which was already expected as it had been leaked to the market. Sterling is just a little weaker and the cost of government debt fell during her speech. The UK is open for business.”
Lindsay James, investment strategist at Quilter Investors, noted that impacts on corporate profitability could mean that businesses are less willing to participate in the investment.
“What now needs to be delivered is economic growth if the recovery in both the public finances and the wider economy is to take place. Whilst re-defining fiscal rules to take account of investment returns is not unreasonable, the timing of it is a direct result of the clear fiscal pressure facing this government,” James said.
“Guard rails appear sensible and subject to independent oversight. However with businesses historically providing around 80% of investment, the big question is whether corporate profitability will be weakened that they no longer wish to hold up their end of the bargain to such an extent.”
