Rachel Reeves has unveiled plans to spend billions of pounds on the UK’s infrastructure after changing the way the government measures debt.
In a major shift in policy ahead of next week’s Budget, the chancellor said the move would allow her to “begin to fix the NHS and start to rebuild our economy”.
She also confirmed that taxes will go up to fund the government’s day-to-day spending commitments - and that areas like the welfare budget will face cuts.
Labour’s election manifesto promised that debt would be falling as a share of the economy at the end of five years.
By changing the way that government debt is measured, Reeves hopes to release an extra £50 billion to spend on long-term projects.
The chancellor said: “My fiscal rules will do two things. The first and most important: my stability rule will mean that day-to-day spending will be matched by revenues.
“Given the state of the public finances and the need to invest in our public services, this rule will bite hardest.
“Alongside tough decisions on spending and welfare, that means taxes will need to rise to ensure this rule is met. I will always protect working people when I make these choices, while taking a balanced approach.”
She added: “My second fiscal rule, the investment rule, will get debt falling as a proportion of our economy.
“That will make space for increased investment in the fabric of our economy, and ensure we don’t see the falls in public sector investment that were planned under the last government.”
Reeves also told ITV News: “Our second rule, our investment rule, will change the way in which we measure government debt so we take into account our assets, not just the costs of investment.”
But Jeremy Hunt said civil servants had warned him against such a move when he was chancellor because of the risks it posed to economic stability.
He said: “The consistent advice I received from Treasury officials was always that increasing borrowing meant interest rates would be higher for longer – and punish families with mortgages.
“What’s even more remarkable is that the chancellor hasn’t seen fit to announce this major change to the fiscal rules to parliament. The markets are watching.”
A Labour spokesperson said: “Labour will not take any lectures from the Tories on how to run the economy. It was Liz Truss and the Conservatives that crashed the economy, which sent mortgages soaring and left the British people worse off.
“Jeremy Hunt and the Tories should be apologising to country for the economic mess they left – with a £22 billion blackhole in the public finances and public services on their knees.”
“Labour’s Budget will fix the foundations of our economy and deliver the change people voted for.”