Budget: Think tanks urge fiscal rule shakeup to boost public services and growth

Think tanks are raising the pressure on Chancellor Rachel Reeves to go ahead with shaking up the government’s fiscal rules, warning it is vital to boost growth and investment.

Ahead of the Budget on October 30, we spoke to several organisations about what measures they would like to see from Labour’s first fiscal event in government since 2010, with several of them calling for changes to allow greater scope for the government to borrow to invest. 

Speculation is growing she could do just that, but Reeves faces a balancing act as recent movements in bond markets suggest some investor nerves about the potential move.

‘Labour has inherited fiscal rules that don’t promote growth or deliver fiscal sustainability’

The Institute for Public Policy Research (IPPR), influential in helping shape Labour thinking over the years, has called on the government to take steps toward more rigorous fiscal rules that also promote growth.

In particular, it has suggested that the Chancellor use the Budget to adopt a new “public net worth” target to free up more money to borrow to invest.

Carsten Jung, senior economist and head of macroeconomics at IPPR, said: “The UK is stuck in a low growth trap, mainly caused by three decades of ultra-low investment. The new Labour government has been elected on a platform to change this, but has inherited fiscal rules that neither promote growth nor succeed on their own terms in delivering fiscal sustainability.

“In the short term, the Budget should target public sector net worth instead of net debt. This would provide significant additional space to borrow to invest and get the UK building again.

“In the long term, we need a more wide-ranging framework that covers the cost of our debt but also reflects future economy-wide impacts of today’s fiscal choices.”

READ MORE: FBU warns Tory austerity ‘needs to stop’ to rebuild fire services

‘The next general election could be won or lost on this Budget’

One of the UK’s oldest left-leaning think tanks, the Fabian Society, has said that the government needs to walk a tightrope between ensuring it remains trusted with the nation’s finances while also kick-starting investment to boost living standards. It suggests reforming pension tax relief to raise much-needed funds.

Luke Raikes, interim general secretary at the party-affiliated think tank, argues that the stakes could not be higher.

He said: “This Budget must show Labour can be trusted with the finances, while also kicking off a Parliament of rising living standards, and beginning a decade of targeted investment where our public services and economy need it most. That is the balance the Chancellor must strike.

“The next general election could be won or lost on this Budget. When the Conservatives first came to power, they set up their next election victory, and 14 years of low growth, stagnating living standards and crumbling public services. This budget must repair that damage and get the country’s economy back into shape.

“That will cost, and there are no easy choices. Fabian Society work has shown that reforms to pension tax relief could bring in substantial revenue – and the Chancellor should ensure her fiscal rules don’t smother growth, thereby suppressing long-term tax revenue, and she must reform them if they do.”

READ MORE: What do trade unions hope to see from Chancellor Rachel Reeves?

‘Failure to act could keep the UK economy stuck in the doldrums’

The Tony Blair Institute for Change has said that how the government defines its debt rule will be one of the most significant decisions the Chancellor will make in the Budget, with the right measure potentially releasing up to £50bn for extra investment each year.

Thomas Smith, director of economic policy, and James Browne, senior policy advisor on economic policy, said that the move Rachel Reeves makes presents a critical opportunity.

“The need for greater public investment in the UK is undeniable. Public services are crumbling, with Lord Darai’s report revealing a staggering £37bn capital shortfall in the NHS alone. More investment is also vital for achieving the government’s ambitious net-zero targets and deploying cutting-edge technologies to improve public services at lower costs.

“Additionally, boosting investment is key to driving economic growth; according to the OBR, a one per cent sustained increase in public investment can lift GDP by 2.5 percent over the long-term.

“The decisions the Chancellor announces on October 30 will set the tone for the whole Parliament. By making this one crucial adjustment to the UK’s fiscal rules, she has the power to unlock billions in investment – potentially breathing new life into the economy, revitalising public services and setting the country on a path toward sustainable growth.

“Failure to act would not only constrain the government’s ability to meet its bold ambitions, but it could also keep the UK economy stuck in the doldrums. The opportunity is there to be seized – what remains to be seen is whether the Chancellor will take it.”

‘The Budget needs to tell a story about challenges but also build hope’

Labour think tank and campaign group Progressive Britain’s deputy director Tom Collinge said the Budget “needs to tell a story, one that is clear about the challenges we face but gives people hope and confidence things will be better”.

He said: “This needs to be a budget that sets Britain up for the future. First, the chancellor needs to link the decisions deferred by the last government – especially public sector pay and the price of tackling the migration backlog – to the tougher measures she takes now.

“If, as seems inevitable, some taxes must rise the chancellor must explain in clear terms why Labour does not shy away from making the hard choices and how they will enable our long term stability.

“The other side of this story is a convincing account of how we restore confidence in Britain. The government has made bold moves to invest where it can, even in the tight fiscal environment and use other levers at its disposal, such as the gradual – and cheap – renationalisation of the railways through non-renewal of franchises.

“The chancellor needs to knits all of this brilliant policy and investment into our future into a narrative that enthsues business and voters.”

SHARE: If you have anything to share that we should be looking into or publishing about this story – or any other topic involving Labour– contact us (strictly anonymously if you wish) at [email protected]. 

SUBSCRIBE: Sign up to LabourList’s morning email here for the best briefing on everything Labour, every weekday morning. 

DONATE: If you value our work, please donate to become one of our supporters here and help sustain and expand our coverage.

PARTNER: If you or your organisation might be interested in partnering with us on sponsored events or content, email [email protected].