Chancellor John Healey and Treasury ministers are working on proposals to increase government borrowing by £9bn a year to take stakes in assets such as infrastructure, housing and business, according to a report in The Times on Tuesday evening.
The extra funds would be handed to mayors to boost investment in local areas, the newspaper reported. The spending could technically fit within the fiscal rules set in the Starmer era, because investments in assets can offset costs on the government’s balance sheet.
UK investors said the reports, which offer some insight into the “flexibility” in the fiscal rules hinted at by both the prime minister, Andy Burnham, and Healey, were unlikely to have an immediate impact on market pricing. Healey was appointed Chancellor in July in the first major appointment of Burnham’s premiership.
‘Small fry’ for the gilt market
An extra £9bn in borrowing each year was “small fry in the grand scheme of things”, according to Richard Carter, head of fixed interest at Quilter.
But Carter said there may be more “cost-effective ways” to consider innovative alternatives to funding government ambitions on growth, such as encouraging retail investors to buy gilts, the bonds which determine the cost of government borrowing.
He added that it is “understandable” that the government is looking carefully at the precise terms of the current fiscal rules, given that its room for manoeuvre has been limited by Labour manifesto promises not to raise income tax, VAT or national insurance.
“Borrowing dressed up in new clothes is still borrowing at the end of the day, and the UK’s precarious fiscal position is still somewhat at the mercy of the bond markets,” Carter said.
“As such, gilt yields are likely to continue to tread higher, and the debt servicing level will remain substantial.”
Although markets may “shrug” at the possibility of more borrowing, he said, there was an “indication that spending remains the government’s preferred antidote to the growth malaise and it is that fact that markets may be less than impressed with”.
The cost of borrowing has been in focus since the change of government. Ten-year gilt yields rose to 4.97 per cent after Burnham’s first speech as prime minister in July.
Healey needs to ‘prove’ worth of borrowing plan
Debt interest payments are projected to total more than £110bn, according to the Office for Budget Responsibility’s March forecast, which put spending on servicing the debt at £110bn in 2025/26. Borrowing costs could rise higher on the back of elevated gilt yields if the conflict in the Middle East produces an inflationary squeeze.
Oliver Faizallah, head of fixed income at Raymond James, said there would be “a little bit of nervousness” in the weeks leading up to the Budget as speculation around spending, borrowing and taxes ramps up. He predicted that bond investors could demand higher interest payments on long-term bonds as worries over the new government’s fiscal stance bubble up.
He said the government will still need to properly communicate and “prove” that investments generate returns.
“My first reaction isn’t ‘Okay, this is the first step towards fiscal irresponsibility’,” Faizallah said.
“In order to satisfy the rules for the liability to be offset with an asset, it needs to be sort of proven that that asset is going to be additive to the UK. Then it just comes down to communication, really.”
