Rachel Reeves announces major change to fiscal rules to free up billions of pounds

Rachel Reeves has confirmed she will change the UK’s fiscal rules in her Budget next week, which will free up billions of pounds for infrastructure spending.

The chancellor said she would make the technical change to the way debt is measured in order to allow the government to pay for extra investment.

She told the BBC that the change was being made "so that we can grow our economy and bring jobs and growth to Britain".

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

The tweak is expected to allow for up to £50bn of extra borrowing to invest in major building projects such as roads and railways. It is expected that the extra money will be used over the course of Labour’s term in power rather than being earmarked for projects in the Budget next week.

Reeves confirmed the change during a trip to the International Monetary Fund’s annual meetings in Washington.

Shadow chancellor Jeremy Hunt said increasing borrowing could mean that interest rates would be higher for longer, which would “punish families with mortgages". "The markets are watching," he added.

Despite the change to the fiscal rules, however, the Budget next week is still expected to result in some cuts to public services and tax rises.

Which taxes could go up in the Autumn Budget?

The much-anticipated Budget will take place on 30 October and is likely to kick off at around 12:30 UK time, just after Prime Minister’s Questions.

Prime minister Keir Starmer has previously warned that the Budget will be “painful” and involve “tough decisions”, leading to speculation about tax hikes.

Over the summer, Reeves accused the former Conservative government of leaving a £22 billion shortfall in the public finances. In recent days, talk has turned to a £40 billion “funding gap” – the sum Reeves is reportedly looking to raise through a combination of spending cuts and tax rises.

Labour has previously promised not to raise income tax, employee National Insurance contributions or VAT. But there are a range of other areas that could be targeted, such as pensions, inheritance tax (IHT) and capital gains tax (CGT).

Furthermore, while income tax rates are not expected to rise, taxpayers will find themselves paying a larger annual bill regardless thanks to the silent tax collector that is fiscal drag.

The personal allowance and income tax thresholds have been frozen until 2028, meaning taxpayers are increasingly finding themselves being dragged into a higher band of tax as their salary increases with inflation.

If the latest rumours are true, Reeves could be looking to extend this freeze (imposed by the previous Conservative government) until the end of the current parliament.

Labour has also confirmed that it will add VAT to private school fees from 1 January 2025 to help fund more teachers in the state sector, meaning costs could increase by up to 20%.