Stefan Rousseau/PA
Rachel Reeves has been told in no uncertain terms to “stop focussing on the debt” by the Organisation for Economic Co-operation and Development as the chancellor looks to fill a supposed £22 billion black hole in the public finances.
Reeves told delegates at the Labour Party Conference that she will make “tough choices” to deal with what she says is a worse-than-expected inheritance from the Conservatives.
In her speech, she said: “My ambition for Britain knows no limits because I can see the prize on offer if we make the right choices now.”
The conference was dogged by the fallout of the decision to slash the Winter Fuel Allowance for millions of pensioners, which has sparked widespread outrage among members of the public.
Defending her decision to cut winter fuel payments for many pensioners, she said: “It was made clear to me that failure to act swiftly could undermine the UK’s fiscal position with implications for public debt, mortgages and prices.
“And so, I took action to make the in-year savings necessary.”
But her overly cautious approach may not be necessary, according to one of the world’s leading economic forecasters.
The Organisation for Economic Co-operation and Development, a body made up of the world’s most advanced economies, says Labour must focus on addressing years of under-investment rather than fixating on its fiscal rules.
“Investment has been sub-par in the past few years and, in order to have stronger growth in the UK, it’s crucial to have more investment,” Alvaro Pereira, the OECD’s chief economist, said after the release of the body’s new forecasts for the world economy.
Public investment in the UK has long fallen below the 38-country OECD average, a factor that will worsen if the rule to bring down the debt ratio and to balance day-to-day spending over five years is maintained, the body has warned.
In stark language, it said Britain’s fiscal targets based on five-year projections “do not allow for public investment to feed through into the supply side of the economy and drive up income.
Since investment is treated in the same way as current spending, resources allocated to public investment often end up as the adjustment variable to meet fiscal rules, resulting in inefficiently low levels of productivity-enhancing public investment and significant delays in approved investment projects.”
Related: Starmer secures £10 billion investment in the North East
