That all sounds great, but the fiscal rules are ultimately a self-imposed constraint. The simple reality is that any extra spending needs to be funded either by tax or borrowing. And this is ultimately what financial markets care about.
The Treasury is going to be naturally cautious. The 2022 mini-budget debacle, which saw a mass sell-off in UK government debt markets, is still fresh in Westminster’s institutional memory. We suspect Reeves won’t ramp up investment anywhere near as far as some people have been led to think.
The fact is that the metrics of public sector net worth are far from perfect. Valuing government assets isn’t at all straightforward. We think the Treasury will stick to a debt-based fiscal rule, and perhaps open a consultation into using the net worth measures in future.
But even if the government does change the fiscal rules dramatically, it’s hard to see it spending all, or even most, of the extra cash afforded to it.
History shows that chancellors tend to want to keep a safety buffer, not just to signal prudence, but also to protect themselves against adverse changes in economic conditions at future budgets. Previous chancellors have generally kept much more left over than the £9bn headroom in March.
Then there are the practicalities. Deploying government investment often isn’t easy. The UK’s notorious planning delays, combined with the Civil Service capacity to deploy investment, means that lifting net investment much above 2.5% of GDP may not be easily achievable.
That would still imply an extra £30bn/year on investment after five years, which would mark a significant increase in borrowing. Concerns about the market impact suggest that what gets announced is likely to be a fair bit lower.