UK's Labour opens door for more investment borrowing

British Shadow Chancellor of the Exchequer Rachel Reeves looks on outside BBC Broadcasting House in London

By William James

LONDON (Reuters) -Britain's opposition Labour Party set out the fiscal rules it would use if it wins the next election, seeking to show voters and investors it can be trusted to reinvigorate a stagnant economy while leaving the door open for more public investment.

Labour's finance policy chief Rachel Reeves used a high-profile public lecture on Tuesday to build on her party's pitch on the economy as it bids to end 14 years out of power by ousting Prime Minster Rishi Sunak's Conservatives.

"Let me be clear about the rules which will bind the next Labour government," would-be finance minister Reeves said, speaking at a business school in London.

"That the current budget must move into balance, so that day-to-day costs are met by revenues, and that debt must be falling as a share of the economy by the fifth year of the forecast, creating the space to respond to future crises."

Her balanced budget rule - which did not come with a specified timeframe - would give Labour room to borrow for investment, something many economists believe is needed to stimulate growth.

The speech comes at a time when Britain's economy is flat-lining, households are still reeling from a bout of high inflation and tax levels are at historical highs to pay for the cost of the COVID pandemic and the impact of the war in Ukraine.

Against that backdrop, Labour is around 20 percentage points ahead in opinion polls and widely expected to form the next government following an election pencilled in for the second half of the year.

Sunak argues the economy is turning a corner thanks to his government's prudent management and that better times lie ahead.

A budget set out by his finance minister earlier this month offered tax cuts, although they were largely paid for by pledges of future spending cuts that analysts say look implausible.

Reeves, a former Bank of England economist, said Labour would keep the central bank's current 2% inflation target and preserve its independence.

Looking to reassure investors, many of whom have baulked at backing Labour in the past and particularly under its previous socialist leader Jeremy Corbyn, she said she would make it more difficult for the government to change its fiscal rules.

Reeves also said she would seek analysis of the long-term effects of the government's investment spending.

Labour's fiscal rule on public debt matches the one currently used by Sunak's government. It means forecasts produced by the budget watchdog must show debt falling as a share of economic output in the fifth year from the fourth.

These so-called rolling targets, now endorsed by both parties, have been criticised by some because they still allow debt to rise over the course of a five-year period.

The new guideline on balancing the day-to-day budget would replace the current rule which requires the government to keep overall borrowing below 3% of gross domestic product by the fifth year of the rolling forecast period.

Reeves argued that a new approach to economic management was needed to counter a cycle where the benefits of growth were not distributed widely enough and living standards failed to rise sufficiently, leading to political instability.

"When hope for the future is allowed to wither and decline becomes a self fulfilling prophecy, then we know the result: we see it all across the world, the rise of populists who offer not answers, but recriminations," she said.

(Reporting by William James, additional reporting by William Schomberg and Farouq Suleiman, Editing by William Maclean)