Can Britain really afford even more borrowing?
Whether or not this bending of the fiscal rules is wise will depend on how well the extra money for public infrastructure is spent.
A hotly anticipated budget announcement is speculation no more, after Rachel Reeves confirmed this afternoon that the government will rip up its existing debt rules next week to free up billions to invest in Britain’s crumbling public infrastructure.
Speaking from the annual IMF summit in Washington ahead of Wednesday’s Budget, the Chancellor insisted: "We need to invest more to grow our economy and seize the huge opportunities there are in digital, in tech, in life sciences, in clean energy, but we'll only be able to do that if we change the way that we we measure debt”.
Reeves will increase her spending power by making a technical change to the way that the Treasury calculates debt. While exact details will be revealed next week, the change is likely to involve replacing the current measure of “public sector net debt” with a new yardstick: “public sector net financial liabilities”. A move estimated to allow for up to £50bn more borrowing for investment.
This is a game-changer. This extra sum is more than the £40 billion-a-year in total that Reeves’s Budget had been expected to raise through all of the anticipated tax increases and spending cuts combined. Her willingness to resort to changing the fiscal rules is a reminder of how dependent the government is on growth. Growth that will be difficult to generate without boosting investment.
But she is taking a risk. The chaos that engulfed bond markets in 2022 after Liz Truss announced major borrowing for her £45bn worth of unfunded tax cuts, on top of her costly energy package, looms large in the Treasury - and the wider country's - memory.
Sure enough, the cost of UK government borrowing rose on global financial markets earlier today, as bond traders anticipated Reeves’s leaked IMF announcement and considered the likely impact of UK debt levels rising yet again.
Despite the risk of delivering a Truss-style market shock, Reeves is attempting to limit the spook factor of her Halloween Budget by demonstrating that she has the economic orthodoxy on side.
Aside from insisting the IMF is behind her, Reeves was also keen to stress today that former Bank of England big cheeses, Mark Carney and Andy Haldane, back the move, as does former Conservative Treasury minister, Jim O’Neill.
Though JP Morgan is less convinced, and warned this evening that using “public sector net financial liabilities” as the new measurement for government debt "could in theory allow almost limitless spending if done under the guise of the National Wealth Fund".
While the IMF has indeed said that public investment in “badly needed” in Britain, it has been equally clear that the UK - along with many other G7 nations - must bring public sector debt under control.
Only two days ago, the ONS released new figures showing that UK public sector borrowing had increased above official forecasts in September, rising to government £16.6bn, making it the third-highest September borrowing since monthly records began in January 1993.
It’s worth remembering too that the government committed in its election manifesto to get public sector debt falling as a share of the economy within five years.
Of course, whether or not this bending of the fiscal rules transpires to be a wise move will depend in large part on how well the new money is spent. It’s understood that the extra room for manoeuvre will not be able to be used for day-to-day spending or to reduce planned Budget tax rises.
“It’s to invest in things to get a long-term return for our country and for taxpayers”, said Reeves this afternoon, who insists the extra cash will fund productive public infrastructure projects that will boost economic growth to make us all richer.
We can only hope that the money is better spent than the £100 billion HS2 disaster. A true black hole in the public finances.
Caitlin Allen
Deputy Editor
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