Rachel Reeves plans to change borrowing rules to free up billions of pounds more for big projects in the next Budget.
The chancellor has pledged to stick to a self-imposed rule: to see the debt – the total amount owed by the government – fall as a proportion of the economy within five years.
She is now deciding how to change the way debt is measured to create more room for long-term investments.
This change will not prevent further tax increases when Reeves announces his tax and spending plans on October 30.
The government's commitment to funding all day-to-day spending with tax revenue means there is little flexibility in this area.
In fact, Reeves is poised to make this self-imposed spending rule the primary way to gauge the country's financial health, rather than the debt.
The Treasury is currently investigating the impact of these changes on the public finances with the independent watchdog – the Office for Budget Responsibility.
His predictions about how much money he will free up will inform Reeves' final decision on how to change the rules.
The precise measurement of debt that will now be targeted will be finalized in the coming days.
Options being considered by Reeves include excluding the Bank of England's national debt losses to create more space for more investment spending.
Repaying the Bank of England's massive support during the pandemic means this broader measure of debt is higher and falling faster, making it easier to meet the national debt reduction target between the fourth and the fifth year of the objective.
A more radical move toward a debt measure that includes state assets such as the student loan portfolio or the highway network could increase the amount of investment more significantly.
The Chancellor has made clear in Parliament that she will reverse cuts to infrastructure spending as part of the economy inherited from the previous government.
The government invested 2.6% of GDP in major projects last year, and under existing plans, spending is expected to fall to 1.7% by 2028-29. The Chancellor believes that this autumn is a “mistake”.
As the opposition accuses the government of “manipulating” the rules, ministers are increasingly arguing publicly that Rishi Sunak's budget rules for 2021 were “anti-investment” and caused some of the problems in public services.
But the Treasury recognizes that there will be “guardrails” on the speed and scale of investment spending, for example through the current main fiscal rule. The £90bn-a-year interest bill for the national debt is part of everyday spending that must all be financed by tax.
The Treasury will need to inform the OBR of its likely budgetary measures this week so that a draft budget forecast can be calculated by Monday. This back-and-forth process will continue until the process is finalized on October 25.
