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Labour is set to go into the next election seeking to neutralise accusations that its policies are dependent on excessive public borrowing with a set of budgetary rules very similar to those of Boris Johnson’s Conservatives.
In her conference speech on Monday, Rachel Reeves, the shadow chancellor, will commit to a target of balancing the budget excluding investment for infrastructure and public debt falling as a share of national income.
“I want people to know that there are fiscal anchors and that there will be restraints and [for] everything that Labour commits to we will explain where the money will come from,” Reeves told the Financial Times.
“Every pledge I make every commitment we make, we will explain how we will pay for it and we won’t make any promises that we can’t keep,” she added.
The binding elements of Reeves’ budgetary rules will be that the Labour party will pledge to balance the current budget in the medium term ensuring that tax revenues at least match day-to-day public expenditure and that the burden of public debt is on a downward trajectory.
These rules are essentially identical to those in the 2019 Conservative manifesto, which Rishi Sunak, chancellor, is set to announce in his Budget on October 27.
The chancellor wants to achieve his rules by 2024-25, while Labour is likely to give itself a little more time before they become binding.
Reeves stressed that the rules would give the opportunity to borrow and spend more on infrastructure than the Conservatives, who have pledged not to spend more than 3 per cent of national income on public investment, but the self-imposed debt rule will not allow spending for infrastructure on a Labour government to be significantly higher than that.
The rules are much tighter than those Jeremy Corbyn’s Labour party proposed at the 2019 election, when it envisaged spending 4.5 per cent of national income on investment, which also sought to balance the current budget, something that was achieved before the coronavirus crisis hit last year.
Labour would introduce three additional fiscal rules, Reeves said, although these would have the effect of being principles rather than binding constraints on a future Labour government. It would sanction borrowing to invest in infrastructure, introduce a permanent mechanism for suspending the rules if the economy was hit by an “exceptional shock”, and would look at public sector assets as well as liabilities.
The final principle would stop a government seeking to massage public debt lower by selling government-owned assets cheaply just to meet the binding rules, Reeves said.
The rules, she added, would be more durable than Sunak’s because they were designed to last. “The purpose of my rules is that they don’t just last one parliament, but they are rules that will always apply, but they give you the flexibility that you need to respond to crises,” Reeves said.
The rules would not eliminate differences between the two major parties on the public finances at the next election because Labour was still likely to go to the electorate promising higher public spending backed by higher taxation.
“We’re not setting out our tax and spending plans . . . and I would expect a Labour government to go in with a different spending envelope to the Conservatives at the next election,” Reeves said.
To ensure a Labour government got value for money from public spending, it would also establish an Office for Value for Money, combining elements of the Treasury and other existing parts of government to undertake regular reviews of public spending and procurement to minimise waste in the public sector.