UK govt changes budget rules to borrow more for investment

UK finance minister Rachel Reeves announced Thursday changes to fiscal rules to open up billions for investment in the centre-left government's maiden budget, but warned of tax rises and spending cuts.

The highly-anticipated October 30 budget will be the first under Labour after 14 years of right-wing Conservative rule, with Prime Minister Keir Starmer already warning of "painful" decisions.

Reeves unveiled the new fiscal rules in an op-ed in the Financial Times, saying that sustainable growth requires "a responsible, long-term plan to invest in the future and improve living standards".

The Labour government has made growing the UK economy a priority after winning national elections by a landslide at the start of July.

Reeves confirmed that "taxes will need to rise" in the budget, without revealing many details on which taxes will be included.

Read also

Pakistan aims to privatize flag carrier in November: Finance Minister

Labour has pledged not to hike taxes on "working people", but there is speculation that other taxes, like capital gains, will be targeted.

It is part of her first fiscal rule to ensure day-to-day spending is matched by revenues.

Given the current state of public finances and the need to invest in public services, this rule will "bite hardest", Reeves wrote.

The government has pledged to claw back what it says is a £22-billion ($28.5-billion) black hole in public finances inherited from the previous government.

Reeves will also make a technical change to the way debt is measured to open up funds for more investment.

She did not detail the exact mechanism but several British newspapers have indicated that Reeves will use a wider measure of debt that takes into account the future returns on investment -- which should, in turn, reduce the debt level.

Read also

China should use fiscal policy to boost growth: IMF

"We need to invest more to grow our economy... but we'll only be able to do that if we change the way that we measure debt," she told the BBC.

High levels of debt

The UK faces the highest levels of state debt since the 1960s, with the figure nearing 100 percent of British gross domestic product, according to official data.

Public borrowing also rose higher than expected in September.

Still, the government has been boosted by some positive data over the past month.

The UK economy bounced back in August after two months of stagnation while inflation has fallen below the Bank of England's two-percent target.

In its latest global update, the International Monetary Fund forecast that the UK economy would grow 1.1 percent this year, up from its previous forecast of 0.7 percent.

The IMF maintained its estimate for British growth next year at 1.5 percent.

Source: AFP