UK’s Borrowing Plans Breathe New Life Into Once-Dead Projects

(Bloomberg) — UK ministers are once again talking up major infrastructure projects, including some dumped by the last government, in yet another sign that Chancellor of the Exchequer Rachel Reeves is preparing to tweak the country’s fiscal rules to allow for more borrowing for investment.
Chief Secretary to the Treasury Darren Jones is due to set out the new Labour government’s 10-year infrastructure strategy in a speech Thursday. That comes after Transport Secretary Lou Haigh signaled the HS2 high-speed railway line will be extended to central London, and the Times newspaper reported ministers are looking at a new rail link between Birmingham and Manchester, after the plan to link them with HS2 was scrapped by the Conservatives last year.
The infrastructure push, despite prior warnings from Reeves about the fragility of Britain’s public finances, suggests she will give herself billions of pounds extra for investment by changing the fiscal rules at her budget on Oct. 30.
The current framework, which requires government debt to be falling as a percentage of the economy in five years’ time, gives Reeves very little room for maneuver. The chancellor has said she inherited a £22 billion ($28.7 billion) shortfall to hit that target from the Tories under ex-premier Rishi Sunak, and she’s warned of tax rises and spending cuts in her fiscal statement.
Since Labour’s landslide July 4 election victory, Reeves has told departments to find £3.2 billion of savings this year as she axed some road and rail projects and put a hospital building program on ice. This week Haigh cast doubt on another infrastructure project, the Lower Thames Crossing, when she said a decision on the road link would not be made until at least May.
But at the same time, Reeves has also said she wants to spur economic growth through investment over the long-term, and that’s why she’s considering changes to the fiscal rules. One of the options she is reviewing is changing how government debt is measured, with different definitions of public debt potentially offering her as much as £50 billion in extra headroom.
“The chancellor has vowed to lead the most pro-growth Treasury in history and has been clear that it is important that we count the benefits of public investment and not just the cost of it,” the Treasury said in a statement, when asked about the prospect of Reeves changing the fiscal rules.
Any tweak carries risk. Reeves can’t afford to roil the markets, especially as the UK’s debt borrowing costs have risen amid a global recalibration of how far central banks are likely to cut interest rates. UK bond yields rose to their highest in more than a year against US and German peers this month. 
Using all of the extra £50 billion of headroom — if that’s what she creates — “would cause quite a lot of problems,” Paul Johnson, director of the Institute for Fiscal Studies think tank, said on BBC Radio 4 on Wednesday. “Could you really sell that debt at a good value? Would the markets get spooked?”
The infrastructure issue cuts to the heart of British politics and Labour’s election victory. Starmer campaigned on a “change” platform, promising a decade of national renewal after 14 years of Conservative-led governments. Manifesto pledges included a green energy transition, a major housebuilding program and the restoration of public services and infrastructure.
Reeves and Starmer also promised not to raise taxes on working people, meaning the government is looking to investment — particularly from the private sector — as the catalyst for growth and to deliver on its promises. 
Starmer is due to welcome hundreds of global CEOs to an international investment summit next week. In the House of Commons on Wednesday, he declined to comment when asked if the government would change how it measures debt, but he also expressed confidence about future investment announcements in the “weeks to come.”
Given Reeves’s earlier move to scrap some projects, the government is unlikely to be readying an infrastructure binge. But one that looks likely to make the cut is HS2, at least at its southern end in London. Haigh said Tuesday it made “absolutely no sense” for the line to end at its current planned terminus of Old Oak Common in west London, and that an announcement would be made soon. 
Sunak dramatically scaled back the HS2 project last year to free up funds for other pre-election transport spending including to subsidize bus fares, which put the link from Old Oak Common to London Euston in serious doubt. He scrapped the link between Birmingham and Manchester. Critics said that decision risked creating a white elephant by undermining the original premise of the project. 
Asked about at HS2 at a regular briefing, Starmer’s spokesman Dave Pares said the government is reviewing its position “across the transport portfolio and infrastructure projects” and would set out more details “in due course.”
–With assistance from Ellen Milligan.
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