New Economics Foundation: Here’s what Rachel Reeves needs to do in the budget to fix our economy

The chancellor has a unique opportunity to set the country on a course toward greater resilience, better living standards and ecological sustainability. Here’s what we hope she will address next week.

 Chaitanya Kumar, is head of environment and economy at the New Economics Foundation

As the autumn budget draws closer, all eyes are on Rachel Reeves, with anticipation and a cautious optimism that this will be a landmark budget for the UK. Facing pressing challenges—from cost-of-living pressures to the urgency of climate action—the chancellor has a unique opportunity to set the country on a course toward greater resilience, better living standards and ecological sustainability. Here’s what we hope she will address next week. 

The foundation of this budget needs to be a rethinking of the UK’s fiscal rules. Recent hints from the chancellor suggest she plans to redefine how government debt is measured, unlocking an estimated £50 billion for critical public spending. By shifting the focus to Public Sector Net Financial Liabilities (PSNFL), Reeves is signalling a readiness to embrace fiscal flexibility. This change could be significant – allowing for more investment in infrastructure, regional economies, and green initiatives. However, it isn’t without risks. Replacing one arbitrary fiscal rule with another will continue to stymie the government’s ability to intervene and fix the country’s structural problems.  

True fiscal reform should allow public spending to work in the interest of people and the planet, not simply serve as a check on balance sheets. At the New Economics Foundation (NEF)_, we have argued that we must go beyond such outdated rules that restrict the government’s ability to make transformative investments and replace it with a system of “fiscal referees”, an independent body accountable to parliament that sets a more flexible framework for public investment depending on the wider macroeconomic environment.  

Another major shift we hope to see is around the government’s new national wealth fund (NWF) a concept that if utilised correctly could reshape regional economies. Our analysis finds that if the NWF was allowed to issue its own bonds, and its liabilities were removed from the fiscal debt target, it could mobilise as much as £100 billion in private financing. A fund like this could drive progress on tackling regional inequality and help those parts of the UK that have historically missed out on investment. By channelling funds into local economies, housing, energy, and sustainable jobs, we could foster growth that isn’t just tied to London but is spread across all regions.  

If the chancellor does change the rules, the obvious question is what will the extra funding be spent on? Decades of underfunding in our communities, especially outside London, have left many regions struggling with outdated infrastructure and limited access to services. NEF’s recent analysis shows the need for significant investment, up to £32 billion a year, in housing, public transportation, retrofitting for energy efficiency, and local energy initiatives. This budget should aim to fill these long-standing gaps, matching spending not just with economic returns but with regional needs, particularly in areas that have been overlooked for too long. Recent analysis has also shown how for every £1mn investment in green infrastructure, the growth in GDP can be up to £1.5mn. Rachel Reeves has vowed to be Britain’s first green chancellor and she prove that unleashing public spending on much needed low carbon infrastructure and services.   

There has been a lot of attention on the government’s rhetoric about not raising taxes on working people. The chancellor’s instincts here are right, and there are lots of other ways in which the government can raise the revenue to pay for the essential improvements to our public services and social security. 

First off, the chancellor should be willing to go after the big banks that are making billions in unearned interest on their reserves at the central bank. She can limit the amount of interest the Bank of England pays, potentially saving the government £55bn over the next five years. Similarly, reforming the tax system to equivalise capital gains with income tax; a small tax on the ultra-wealthy (those with over £10mn in assets) and raising carbon prices should all be considered seriously in raising revenue. 

The budget must also address poverty directly, especially child poverty, which has grown despite the broad recognition of its harms. Policies like the two-child limit on benefits have exacerbated poverty and need to be reversed if we want to reduce inequality. A commitment to boosting social housing investment is essential here as well, ensuring that every child grows up in a safe, secure home.  

Finally, this budget should lay out a clear path to achieving net-zero targets, with tangible commitments to green investment. With climate scientists sounding ever-louder alarm bells, the world is running out of time to cut carbon emissions and limit global heating to below 2 degrees. UK’s international leadership on climate is currently not where it should be, and the Labour government needs to position the UK as a serious country that sets both a higher ambition for its short-term climate targets and supports developing countries in transition to a low carbon economy.  

The chancellor has the opportunity on Wednesday to deliver the most significant budget since George Osborne imposed austerity in 2010. She must take this opportunity to change the rules that are holding this country back and build a more equitable and resilient UK for all.