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The UK government has set out its “guardrails” for investment to reassure bond investors as chancellor Rachel Reeves prepares a multibillion-pound borrowing programme to fund capital spending.
Darren Jones, Treasury chief secretary, said an array of government quangos and independent watchdogs would ensure ministers used any extra borrowing to fund sensible investments decisions.
Jones said a new infrastructure oversight body, along with an Office for Value for Money and the work of the existing National Audit Office, would guard against wasteful capital spending.
He said the bodies would provide “independent checks and balances, institutional expertise” to hold Labour to whether it was “actually delivering in the way we’ve promised”.
Reeves has signalled that the upcoming Budget on October 30 will focus on ramping up capital spending, enabled by an expected change to her fiscal rules to allow significantly more borrowing for investment.
Bond investors have been watching her plans anxiously. UK government debt has sold off in recent weeks, sending 10-year gilt yields above 4.2 per cent, from 3.75 per cent in mid-September.
Bond prices have since regained some of that ground, helped by a sharper-than-expected fall in inflation and signs that Reeves is planning big tax rises to close a £40bn funding gap in day-to-day spending.
Labour announced last week that it would set up a National Infrastructure and Service Transformation Authority, intended to exert more powerful oversight over government departments’ delivery of new projects.
NISTA will be created through the merger of two existing bodies: the Infrastructure and Projects Authority and the National Infrastructure Commission.
It also intends to set up an Office for Value for Money, which would be designed to ensure more sensible public expenditure, Jones said. Ministers will also encourage more scrutiny of capital spending decisions from the National Audit Office, the Whitehall spending watchdog.
Jones is currently overseeing a spending review with Labour cabinet ministers ahead of the Budget, with some complaining that the current fiscal envelope is too tight. But he insisted the Treasury was not imposing a repeat of the “austerity” of a decade ago.
“Austerity was an attempt to . . . shrink the size of the state,” he said. “That is different to getting a grip of public finances.”
Reeves has criticised her Conservative predecessor Jeremy Hunt for pencilling in reductions in public sector net investment from around 2.4 per cent of gross domestic product to 1.7 per cent by the end of the latest five-year official forecast.
Avoiding those cuts and keeping net investment at this year’s level as a share of GDP would imply £24bn of extra annual spending by 2028-29.
The Treasury has weighed reforming its existing measure of public debt — public sector net debt excluding the Bank of England — to provide extra capacity to borrow for investment.
One reform would strip out losses being incurred by the BoE as it unwinds its quantitative easing stimulus programme to create an extra £16bn of financial headroom in the latest official forecast.
Another more radical idea under Treasury consideration involves a shift to measures of public debt that give credit for assets created via investment, as well as liabilities.
One such measure called public sector net financial liabilities (PSNFL), which includes a range of financial assets, would generate extra headroom of more than £50bn.
Reeves told the Financial Times earlier this month that she would not be in a race to get “money out of the door”.
She has another fiscal rule that requires her to fund day-to-day spending — excluding investment — with tax revenues, though she has not yet specified the time period over which she would hit that goal.
Additional reporting by Ian Smith