Chancellor Rachel Reeves began her first Budget by promising to tackle borrowing costs, the budget deficit and net borrowing. In the coming year, Public Sector Net Borrowing (‘PSNB’) is forecast to be £127.5 billion, 4.5% of GDP. Under current plans, this will reduce to £70.6 billion, 2.1% of GDP by 2030.
She set out the new government’s commitments through the “strong fiscal framework” outlined in its “Charter for Budget Responsibility”. A key manifesto pledge for Labour was to “balance the books” and one of the two strands of this Charter is the “stability rule”, mandating that the budget will be in balance by 2029-30 and going forward. In essence, this means that everyday government expenses must be covered by revenue, allowing increases in net debt only for capital investments. The other rule introduced in this charter is the “investment rule”: net financial debt (measured as public sector net financial liabilities or “PSNFL”) must fall as a proportion of GDP by 2029-30.
Rachel Reeves has modified the way that the government measures its net debt position. At present, Public Sector Net Debt (‘PSND’) is calculated by netting liquid assets against the total public sector debt. The proposed new metric, PSNFL, however, proposes that the illiquid financial assets such as private company equity holdings, pension scheme assets and loans be included.
The Chancellor framed this as a way to “balance the benefit expected from investment against the additional borrowing costs”. Measuring the net worth or the net financial liabilities held by the government could give the government room to borrow as much as £50 billion more than currently planned over its parliamentary term.
Other elements of the Charter for Budget Responsibility include incorporating annual fiscal reviews and biennial Spending Reviews, which set departmental budgets for at least three years. These changes aim to improve predictability and reduce fiscal shocks by limiting adjustments outside the primary fiscal event each year. The Office for Budget Responsibility (OBR) will play an active role, monitoring the framework’s adherence to these rules.
The government say that these amendments are designed to empower the government to increase investment in the economy and report a better net debt position while increasing tax receipts by £40m.