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Rachel Reeves, the shadow chancellor, will on Tuesday set out new rules pledging that a Labour government would aim to borrow only to invest as part of an agenda to inject greater “stability” into policymaking.
Reeves will vow in her Mais lecture in the City of London that her rules would ensure that “the current budget must move into balance so that day-to-day costs are met by revenues”.
Reeves will also confirm that Labour would stick to Rishi Sunak’s fiscal rule that overall public debt should be falling as a share of the economy by the fifth year of the official forecast. The rolling target has been criticised by economists, but Reeves will insist that it “creates the space to respond to future crises”.
The commitments are part of a pitch by Reeves to portray Labour as a party of fiscal discipline and hit back at Conservative claims that the opposition would drive up taxes in a bid to support higher spending if it won the election. She will declare: “We will not waver from strong fiscal rules.”
Labour is also attempting to draw a contrast with the ill-fated administration of former Tory prime minister Liz Truss, whose so-called “mini” Budget was not accompanied by a forecast from the government’s fiscal watchdog, the Office for Budget Responsibility.
Reeves will vow to protect the UK’s economic institutions, which were criticised by Truss during her shortlived premiership. “Politicians who undermine those strengths are playing a dangerous game,” the shadow chancellor will say.
She will also declare that the fiscal rules can only be suspended if the OBR declares the UK to be in an economic crisis.
Reeves’ allies said the rule requiring day-to-day costs to be met by revenues would not be achieved immediately — because this would have required deeper upfront spending cuts to strained public services — but over the first term of a Labour administration.
They added that it seemed “sensible” to follow the current Conservative government’s plan to balance the current budget in the fourth year of the forecast. But the timetable would depend on whether the chancellor, Jeremy Hunt, holds another tax-cutting fiscal event in the autumn.
Reeves will say that by shifting to a borrowing rule that targeted day-to-day spending, instead of the overall deficit, Labour would “prioritise investment within a framework that would get debt falling as a share of GDP over the medium term.”
The government presently targets the overall budget deficit, including capital spending. Labour argues this creates an incentive to cut investment to meet the deficit target.
The shadow chancellor will also announce a requirement for the OBR to report on the long-term impact of investment measures for growth. Wider measures of public sector assets and liabilities would be set out at fiscal events in a bid to show how “good investment decisions” boost the health of the government’s balance sheet.
She will also confirm for the first time that Labour would retain the Bank of England’s current 2 per cent inflation target, as she tries to reassure the City that she will maintain macroeconomic stability.
Meanwhile Reeves will say that the next election will be “an inflection point” similar to the one that faced the country in 1979, when Margaret Thatcher’s government replaced a tired Labour administration.
Although Reeves argues that an incoming Labour government would differ from the Thatcher administration by ensuring a recovery was “broad-based, inclusive and resilient”, she also admires aspects of what the former Tory premier achieved.
“The economy grew, we became wealthier, she shook things up, even if it wasn’t the right sort of growth,” said one Reeves ally.