Rachel Reeves hints at debt-to-GDP measure change to unlock £17bn for budget

Rachel Reeves hints at debt-to-GDP measure change to unlock £17bn for budget

6 Aug    Finance News, News

Chancellor Rachel Reeves has left open the possibility of altering a key measure of the UK’s debt, a move that could potentially release £17 billion for her upcoming autumn budget.

During a trip to New York and Toronto, Reeves indicated she would clarify her fiscal rules in her maiden budget, amidst speculation that the government might adjust its debt-to-GDP ratio to exclude losses from the Bank of England’s bond-buying programme.

Reeves, affirming her commitment to the Labour government’s fiscal discipline, confirmed that the target of reducing the debt-to-GDP ratio within a rolling five-year period remains unchanged. However, excluding the Bank’s quantitative easing losses from this measure could provide significant fiscal headroom. Last year, the Treasury had to transfer £45 billion to the Bank of England to cover these losses.

“We’ll get debt down as a share of GDP. And crucially we will balance tax receipts with day-to-day spending. But we’ll set out the precise details of that at the time of the budget,” Reeves stated, emphasizing that her fiscal rules are “non-negotiable.”

This potential adjustment comes as the government seeks ways to meet debt targets without increasing income tax, VAT, or national insurance, especially after Reeves revealed a £22 billion funding gap in this year’s inherited spending plans.

Analysts and investors have largely agreed that the market would not penalise the government for such a change, even though it would only provide a one-off benefit to fiscal calculations. Michael Saunders, a former Bank of England rate-setter, noted that the impact of changing the debt measure would be “temporary and will fade … perhaps just after the Office for Budget Responsibility’s five-year horizon”.

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Reeves is in New York for meetings with Robert Vince, head of BNY Mellon, and will meet US business leaders and investors on Wall Street on Tuesday as part of a charm offensive before Labour’s international investment summit in October. She will also meet Mark Carney, former governor of the Bank of England, in Toronto on Wednesday.

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