TAXES and borrowing are both set to increase as Rachel Reeves signalled she would rewrite the way government debt is measured in her first Budget.

The Chancellor said she faced difficult choices but insisted her Budget would “begin to fix the NHS and start to rebuild our economy”.

The cost of government borrowing increased in response to speculation the Chancellor would change debt rules to spend billions more on investments.

Tory former chancellor Jeremy Hunt said increased borrowing could increase the cost of mortgages for hundreds of thousands of households.

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During a round of broadcast interviews while attending the International Monetary Fund meeting in Washington DC, Reeves confirmed a technical change in the way she would measure progress against the target of managing debt.

Writing in the Financial Times, Reeves said her fiscal rules would be “the rock of stability at the core of my Budget”.

Labour’s 2024 election manifesto said Reeves would follow two rules: The current budget would be in balance so that day-to-day costs are met by revenues.

The second rule is that debt must be falling as a share of the economy by the fifth year of the economic forecast.

On Thursday she confirmed that the way debt is measured as part of that target would be changed to allow greater flexibility.

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Reeves 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.

“Crucially, my stability rule will also cover the interest on our national debt and unlike the previous government I won’t cut capital budgets to make up for shortfalls in the day-to-day running costs of departments.

“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.”

She 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.”

(Image: Benjamin Cremel/PA Wire)

She is expected to target public sector net financial liabilities (PSNFL) as her new benchmark for government debt rather than the current measure of underlying public sector net debt.

A shift to PSNFL would give her greater headroom to meet her debt reduction target, because it includes a wider mix of state assets and liabilities – notably including expected student loan repayments to offset some of the liability.

Had PSNFL been used as the debt target in the March 2024 budget, the “headroom” – the margin by which the fiscal rule is met – would have increased by £53 billion according to the Institute for Fiscal Studies.

She told ITV: “What I hope that people will see in the Budget next week is that I’m a responsible Chancellor being honest and transparent about the situation with the public finances and indeed the trajectory for public services, but that – in that situation and the difficult choices – that we’ve done everything in our power to protect working people, to begin to fix the NHS and to start to rebuild our economy and fix the foundations of our economy.”

Shadow chancellor Hunt 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.”

The prospect of tens of billions in extra state borrowing sent gilt yields up by as much as eight basis points on Thursday.

It is thought this could see the Bank of England rein in cuts to interest rates, impacting UK gilts by sending prices lower, which conversely causes its yield to rise.

Gilts were also said to be under pressure after Bank governor Andrew Bailey said on Wednesday that there were still questions over whether elements of inflation may remain stubborn in the economy.

Liberal Democrat Treasury spokeswoman Daisy Cooper said: “The Chancellor must invest any extra borrowing wisely and that should start by fixing the previous Conservative government’s legacy of crumbling hospitals and GP practices that plague our communities.”

Reeves’s confirmation that taxes will rise to meet her day-to-day spending needs came as Starmer Starmer insisted there was no reason for entrepreneurs to quit the UK.

With speculation the Government could raise capital gains tax, putting off business start-ups and foreign investors alike, Starmer played down concerns about the Budget’s impact.

Asked if he thinks entrepreneurs may want to leave the UK following the reported tax increases, Starmer told reporters: “There is no reason for them to.”