ALEX BRUMMER: Chancellor seeks global support to change debt rules

Britain’s first chancellor is making waves among the blue-clad financial executives of the International Monetary Fund.

The imminent approach of Rachel Reeves’ first budget is generating enormous attention.

When she marched across the balcony of the IMF headquarters building, dressed in a pale lilac pantsuit and sporting an Armistice Day poppy, cellphones and cameras appeared with bankers and monetary officials looking for selfies.

Enjoying the moment, Reeves even posed against the balustrade while the male and female monetary officials took their photos. I can comfortably say that none of his recent Conservative predecessors, such as Jeremy Hunt or Philip Hammond, attracted the same attention.

Kwasi Kwarteng was more of a magnet for photographers, but only for his nocturnal retreat from the British ambassador’s residence in Washington.

Reeves has had a dubious start since taking charge, with claims of having inherited the worst economic outlook since the Second World War and his discovery of a £22bn black hole in the public finances. That has become every Labor minister’s mantra when questions are raised about failing departments.

By the standards of the changes Reeves will unveil on October 30, his confirmation of a new way of managing public finances will take the already declared deficit into the minor league.

The “stable” rule to make the current pay for itself through taxes and the sweeping new debt rule, particularly the latter, is almost as radical as anything Liz Truss attempted.

The easing of the debt rule gives the Government up to £75bn for public investment, increasing it from 1.7 per cent to 2.5 per cent of output (gross domestic product). The uncertainty has certainly alerted the British bond market, as the gap between benchmark German bond yields and British instruments is widening. Sensibly – unlike Truss – the Chancellor appears to have learned lessons from that experience.

Spend time in Washington to gain buy-in from world leaders. Among those he has brought to his side is the feisty US Treasury Secretary Janet Yellen, who memorably gave Kwarteng a reprimand two years ago.

Reeves has also defended IMF Managing Director Kristalina Georgieva that her proposals are in line with the Fund’s advice on the need for lagging European economies to inject more funds and efforts into technology, startups and innovation.

Without a doubt, investing more money in cutting-edge technology and pharmaceuticals is an excellent idea. Reeves won no prizes for his techno-enthusiasm when he cut £1.3bn of funding for technology and artificial intelligence, including an £800m research project on supercomputers at the University of Edinburgh.

This paper has long advocated for greater tax breaks for research and development. It is also true that Britain would be in a much better position to support technology and improve productivity if it had not so easily allowed command and control of several large technology companies to fall into the insecure hands of private and offshore capital. Reeves’ new debt rule, which excludes all types of financial liabilities from being counted as public debt, such as Bank of England liabilities and student loans, is controversial. But several smaller European economies, including the Netherlands and Denmark, do something similar.

The United States has never counted the Federal Reserve’s pandemic-era bonds as part of its debt. Reeves is also understood to have shared his broader tax rules with his former bosses at the Bank of England. Truss never met or called Governor Andrew Bailey. Funds for public investment cannot be trusted to be well spent. Governments are not good at that. Reeves, at least, had common sense in preparing the ground.

Zone defense

The coming weeks in the United States are unlikely to be calm, whatever the outcome of the polls.

As a precaution, huge concrete barriers are being erected around the White House, the Capitol and other public buildings in defense against a repeat of the riots of January 6, 2020. Nothing is likely to be dismantled until after the inauguration of the next president on January 6. January 20.

Distressing days lie ahead for geopolitics and markets.