Rachel Reeves will pledge to reverse huge cuts in public investment in her budget next week after she confirmed that rules limiting her spending power will be overhauled to enable the government to free up as much as £50bn for infrastructure spending.
The chancellor said she would revise how the Treasury calculated shortfalls in the government budget over the rest of the parliament to free up funds to invest in public infrastructure.
Reeves chose to announce that she would change Britain’s debt rule during a trip the International Monetary Fund (IMF) annual meetings in Washington on Thursday – as first revealed by the Guardian on Wednesday.
She said she was not prepared to see public investment fall even further behind the levels seen in other major economies.
Experts have calculated that the new rules could free up more than £50bn five years compared with the plans left behind by the previous Conservative administration.
Reeves said: “I can confirm today that I 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.”
Concerns in financial markets that Labour will allow a spending bonanza, mimicking Liz Truss’s infamous mini-budget in 2022, were scotched by the chancellor, who said she would maintain strict limits on Whitehall budgets and would not spend all the extra investment funds in her first budget.
“It’s really important for the sustainability of public finances, that we give confidence to markets that we’re not borrowing to pay for the day-to-day functioning of government,” she said. “And we’ll work with the National Audit Office and the Office for Budget Responsibility to make sure that all those investments are properly validated.
“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.”
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The cost of government borrowing increased ahead of the announcement as bond traders considered the likely impact of UK debt levels moving higher.
The yield – in effect the interest rate – on UK government bonds rose by about six basis points to trade above 4.2% in early trading on Thursday morning before easing, contrasting with a fall in borrowing costs for other comparable countries, including the US. The spread between gilts and German debt rose to the highest in more than a year, according to Bloomberg.