Chancellor Rachel Reeves confirms government will change fiscal rules

We asked the chancellor why changing the fiscal rules mattered.

Rachel Reeves: I’ll be setting out two fiscal rules at the budget next week. The first is the stability rule to pay for the spending through tax receipts. That was something that the previous government weren’t even trying to do, let alone able to meet. That’s really important because that’s about the sustainability of the public finances.

Helia Ebrahimi: But what about the other rule?

Rachel Reeves: The second rule, the investment rule, will see debt fall as a share of GDP. But I can confirm today that we’ll be changing the way that the government measures debt. Because I’ve listened to what the International Monetary Fund has said about the need to free up resources for investing in capital.

Helia Ebrahimi: But last week when we spoke, you said it was a balancing act. Aren’t you taking a massive risk on the reaction of financial markets? I mean, this morning gilt yields have already reacted negatively.

Rachel Reeves: On the investment rule, we put guardrails in place to ensure that every pound of taxpayers’ money, government money, that is invested, delivers a return for taxpayers. And we will have the National Audit Office and the OBR involved in validating those investments to ensure that we are getting good value for money. But there’s a decision to be made about whether you want to embrace decline as the Conservatives did, with public sector net investment as a share of our economy declining rapidly during the course of this parliament – that was their plan. Or whether you want to embrace the huge opportunities there are. I’m determined to get our share of investment and the good jobs that come with it.

Helia Ebrahimi: No one’s disputing the vision, but it is risky. At the moment, our debt interest bill is more than the entire Department of Defence, more than the Department of Education. Is this a guarantee that you think our borrowing costs will not go up if you borrow an extra £50 billion?

Rachel Reeves: We’ll set out the numbers and of course we will leave sufficient headroom.

Helia Ebrahimi: It’s a risk though, it’s a risk.

Rachel Reeves: The risk is carrying on the path that we are on, which has seen debt increase over the last 14 years. If we continue on this path that we are on today, we’ll see continued declines in living standards and we will continue to fail to realise our potential. 

Helia Ebrahimi: And that’s a bigger risk than the financial market risk – just definitively.

Rachel Reeves: It’s really important that when financial markets see what we’re setting out next week, that they see that debt is on a downward trajectory as a share of our economy, that we’re getting a grip of day-to-day spending by funding it through tax receipts, and that there are guardrails around the investments that will be permitted.

Helia Ebrahimi: Let’s talk about other opportunities. The IFS says that this could be the biggest tax-raising budget since Denis Healey. Is that a badge of honour for you?

Rachel Reeves: We’ll set out our plans in the budget next week, but I was clear in July that the state of the public finances, the £22 billion black hole that we have inherited from the Conservatives, will require difficult decisions – difficult decisions on spending, on welfare and taxation. But those decisions are necessary to get our public finances on a stable trajectory.

Helia Ebrahimi: You seem to be saying that you stick to the letter of the manifesto, but not to the spirit of the promises that were made to voters. Fiscal drag undoubtedly affects working people, and if you raise national insurance on employers, it’s still raising national insurance. Do you worry that people at home will think this is just a political sleight of hand? 

Rachel Reeves: When people see the budget next week. I hope they will see that I’ve done everything in my power to protect the living standards of ordinary working people, that we’re not taking money out of their pay packets. My ambition for Britain has never burned as bright as it does today. There are huge opportunities, and I’m determined that this is a government that works with business to realise that potential for Britain.

Helia Ebrahimi: What do you say to Lord Mervyn King, who has complained you should stop mentioning you’re the first female chancellor? Does that sound like out-of-date sexism to you? 

Rachel Reeves: I’m really proud to be the first female chancellor in 800 years. A woman has never delivered a budget or had the role of Chancellor of the Exchequer. Now, before I became a politician, I worked as an economist at the Bank of England – I have huge respect for Mervyn King.

Helia Ebrahimi: Does he get a free pass on sexist comments like that?

Rachel Reeves: Mervyn is welcome to say what he wants, but I am really proud and I hope that a woman delivering the budget sends a signal to young women and girls across our country that there is no ceiling on what they can achieve and there should be no ceiling on their ambitions. And I’m proud to finally smash this glass ceiling.

Helia Ebrahimi: And I just want to ask you on cost of living, because we’ve been in Cornwall in the constituency that switched from Tory to Labour – they took a chance on you. But at food banks, there are mothers who worry about the two-child benefit cap, and there are pensioners who worry about heating their home. When will their lives get better?

Rachel Reeves: I hope that what they’ll see in the budget next week is that I’m doing everything in my power, even in these difficult circumstances, to protect working people and improve living standards. But also crucially – and I know that families and older people rely on our NHS more than most – that we’ll begin to fix our NHS to bring down waiting times.