Chancellor Rachel Reeves has unveiled UK a budget aimed squarely at addressing the nation’s long-standing challenge of sluggish economic growth. In a decisive move, she has rewritten the fiscal rulebook to unlock billions in new investments, prioritizing growth while still pledging fiscal responsibility. As the first female Chancellor in the office’s 800-year history, Reeves is making history not just through her position, but through her approach to economic renewal.
Central to this strategy is a significant shift in how government debt is measured. Rather than sticking to “public sector net debt,” Reeves has adopted “public sector net financial liabilities” as the benchmark. By including a broader range of assets in this measure, she has effectively reduced the apparent debt-to-GDP ratio, allowing more flexibility for borrowing to fund essential infrastructure, health, education, and green energy projects—all without breaching fiscal sustainability goals. This is borrowing to invest, not to consume, a distinction Reeves has made clear, underscoring her commitment to creating long-term assets for the economy rather than short-term spending splurges.
The investment focus – Reeves’s own “invest, invest, invest” – has echoes of Tony Blair’s famous “education, education, education” mantra but rings closer, in economic terms, to Gordon Brown’s references to “post-neoclassical endogenous growth theory.” This ugly term (common in modern economics) simply suggests that government policies and institutions can play a key role in fostering growth through stimulating innovation, and human and capital investment. Unlike past initiatives that prioritized consumption, Reeves’s budget envisions public investment as the engine of sustainable growth, setting the stage for long-term productivity gains. And it is productivity growth that will ultimately lead to higher wages, corporate profits and tax revenues.
However, Reeves has paired these ambitions with immediate revenue-raising measures with taxes increasing by £40 billion annually. The budget introduces an increase in employers’ national insurance contributions and raises capital gains tax. These changes come with potential implications for business operating costs and investment decisions, which Reeves must balance against anticipated gains in productivity.
But there are risks. By concentrating on public investment, Reeves’s budget inevitably limits the room to address real-time pressures on household incomes. Striking a balance, she faces the immediate challenge of rising taxes impacting real incomes and consumption as she prioritizes the longer-term vision. The Chancellor must also keep an eye on the response from financial markets, which will be watching closely to see how the ambitious borrowing levels align with her pledges of fiscal responsibility.
In a time when the UK’s growth has remained persistently sluggish, Reeves’s budget represents a high-stakes commitment to “build forward” with a clear focus on growth-enhancing investments. While the path may not be without bumps, today’s budget marks a new chapter in addressing the UK’s economic malaise, with hopes pinned on transformative public investment as the key to sustainable economic revival.
Michael Kitson: Economist 