Chancellor Rachel Reeves to change public finance rules to borrow more for investment
Rachel Reeves will rewrite the government’s fiscal rules in next week’s budget to allow her to increase borrowing for public investment by around £50bn.
Speaking to Sky News in Washington DC, the chancellor said that the self-imposed rule under which borrowing must be falling by the fifth year of economic forecasts will be redefined from the current measure of public sector net debt.
Ms Reeves would not be drawn on what measure will replace the current rule but there is speculation that she will favour using public sector debt net of financial liabilities (PSNFL).
Under this definition, investments such as the government’s student loans book are defined as assets rather than liabilities, which on current measures would allow a further £53bn of borrowing.
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The chancellor said the second fiscal rule, under which day-to-day spending must be funded from government revenue rather than borrowing, would be unchanged.
Growing consensus
Ms Reeves cited support for increasing the debt threshold from leading British economists, as well as the International Monetary Fund, which this week said public investment should be protected and was “badly needed” in the UK.
She insisted the change was necessary to end years of declining public investment and deliver on Labour‘s promise to deliver growth.
“Under the plans that I have inherited from the previous Conservative government, public sector net investment as a share of our economy was due to decline steeply during the course of this parliament,” she said.
“I don’t want that path for Britain when there are so many opportunities in industries from life sciences to carbon capture, storage and clean energy to AI and technology, as well as the need to repair our crumbling schools and hospitals.”
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Ms Reeves denied that she was effectively fiddling the rules to get around her manifesto pledge not to increase income tax, VAT or national insurance.
“The rule that really bites is the first rule, the stability rule, to get day-to-day spending funded by tax receipts. That’s something that the previous government weren’t even trying to achieve and we will show in the budget next week how we will deliver on that promise.
“The second role is about being responsible. By seizing the opportunities, but doing it in a way where we are making sure we’re getting value for money for every pound of taxpayer’s money spent.
“Of course we’ll put guardrails in place to ensure that every pound of taxpayers’ money that is spent is spent wisely, and will involve the National Audit Office and the Office of Budget Responsibility in that.”
The first test of the change in the debt rule will be the reaction of bond markets, which rose slightly on Thursday following reports of Ms Reeves’ plans.
Taken together, the redefined fiscal rules set the terms of a budget that is likely to see tax rises and public spending cuts balanced by more freedom to borrow.
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Tax rises not ruled out
Ms Reeves did not rule out a raft of tax rises, including adding national insurance to employers’ pension contributions, from which public sector employers may be exempt.
“I was clear in the statement I made to the House of Commons in July that there will be difficult decisions in this budget around spending, welfare and taxation. But the precise details I will set out to the House of Commons next week.
“I will be a responsible chancellor. I will be honest and transparent about the challenges we face, but also how we’ll fix them to wipe the slate clean after the mismanagement we’ve seen in the last few years under the Conservatives.”
Gareth Davies, shadow exchequer secretary, said: “Before the election Rachel Reeves promised that she would not ‘fiddle’ the fiscal rules, and now it seems she is going to do exactly that. Remarkably she is announcing this not to Parliament, but to the IMF in advance of the budget.
“This is already having real world effects, with borrowing costs rising. This uncertainty over additional borrowing risks interest rates staying higher and for longer. It’s families up and down the country who would pay the price.”
One of the world’s largest investment firms has waded into the fight over the future of Thames Water, the water utility which is racing to stay afloat.
Sky News has learnt that KKR is in talks with Thames Water and its advisers about participating in a £3bn share sale which forms part of a wider recapitalisation plan.
City sources said this weekend that KKR, which has more than $550bn of assets under management, was among a handful of parties which had accessed a data room for potential investors.
Rothschild, the investment bank, is running a process to raise around £3bn from the sale of an equity stake in Thames Water, which is grappling with a debt mountain of as much as £19bn.
Other investors which have expressed interest in acquiring newly issued shares in the water company include Carlyle and Castle Water, the latter of which is controlled by Graham Edwards, the Conservative Party treasurer.
Global Infrastructure Partners, which is owned by BlackRock, Brookfield and Isquared are also reported to have lodged an interest, although sources said that the latter two were unlikely to play any further role in the process.
The crisis at Thames Water is presenting Sir Keir Starmer’s administration with a challenge as the debt-laden company attempts to avert temporary nationalisation.
Insiders said that KKR was “a serious player” in the equity process being run by Thames Water, although its outcome hinges on a final determination by Ofwat, the industry regulator, which is due by January at the latest.
Thames Water – and other suppliers across Britain – wants to hike bills and is demanding leniency from Ofwat on fines for past transgressions.
One obstacle to KKR buying a big stake in Thames Water, which has more than 15m customers, may be its 25% holding in Northumbrian Water.
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Under Ofwat’s mergers regime, the Competition and Markets Authority would need to review the deal, although there would not be an automatic prohibition.
The share sale process is being run in parallel to an attempt to raise up to £3bn in debt financing from hedge funds and other investors.
A battle has broken out between the holders of Thames Water’s class A bonds, which account for the bulk of its borrowings, and its riskier class B debt.
Both sets of bondholders have submitted proposals to the company, with the class A’s arguing that theirs is more certain and the class B’s arguing that theirs will save the company £380m or more in fees and interest over a 12-month period.
Thames Water has already endorsed the class A group’s offer, with an initial £1.5bn of funding to be delivered immediately.
The class A bondholders are now trying to secure backing for their proposal within the next fortnight.
Their group, which includes the American hedge funds Elliott Advisers and Silverpoint, would earn in the region of £650m during the first year of the financing.
One area of controversy is likely to be any incentive plan for Thames Water bosses, led by chief executive Chris Weston, as part of a deal to give the company a stay of execution.
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Last month, the environment secretary, Steve Reed, established an independent review of the industry that will look at far-reaching reforms.
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It was unclear this weekend which of KKR’s funds was participating in the Thames Water equity-raise.
The firm owns John Laing, an infrastructure investor, which it took private in 2021.
It has also owned South Staffordshire, another water company, selling its 75% interest in 2018.
KKR declined to comment.
The business secretary will next week hold talks with dozens of private sector bosses as the government contends with a significant corporate backlash to Labour’s first fiscal event in nearly 15 years.
Sky News has learnt that executives have been invited to join a conference call on Monday with Jonathan Reynolds, in what will represent his first meaningful engagement with employers since Wednesday’s budget statement.
Rachel Reeves, the chancellor, unsettled financial markets with plans for billions of pounds in extra borrowing, and unnerved business leaders by saying she would raise an additional £25bn annually by hiking their national insurance contributions.
An increase in employer NICs had been trailed by officials in advance of the budget, but the lowering of the threshold to just £5,000 has triggered forecasts of a wave of redundancies and even insolvencies across labour-intensive industries.
Sectors such as retail and hospitality, which employ substantial numbers of part-time workers, have been particularly vocal in their condemnation of the move.
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On Friday, the Financial Times published comments made by the chief executive of Barclays in which he defended Ms Reeves.
“I think they’ve done an admirable job of balancing spending, borrowing and taxation in order to drive the fundamental objective of growth,” CS Venkatakrishnan said.
His was a rare voice among prominent business figures in backing the chancellor, however, with many questioning whether the government had a meaningful plan to grow the economy.
Mr Reynolds held a similar call with business leaders within days of general election victory, and over 100 bosses are understood to have been invited to Monday’s discussion.
A spokesman for the Department for Business and Trade declined to comment ahead of Monday’s call.
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