A big increase in British public borrowing to boost investment would not be risk-free, a think-tank warned ahead of the first budget of the new government, as markets were keeping a close eye on the scale and purpose of extra government borrowing.
Finance minister Rachel Reeves said this week it was “time that the Treasury moved on from just counting the costs of investments, to recognising the benefits too”.
The non-partisan Institute for Fiscal Studies said Reeves would need to justify any increase in borrowing for more public investment.
“A large increase in borrowing would not be risk-free,” IFS senior research economist Isabel Stockton said. “Hiding behind a technicality is not enough.”
Former Prime Minister Liz Truss’ decision in 2022 not to submit her big tax cut plans to checks for their impact on the public finances led to a bond market crisis that forced her out.
British public debt has risen to 100% of annual economic output from 64% in 2009/10.
Reeves says she will keep the existing target for public debt to be on track to fall between the fourth and fifth years. But she did not specify which measure of debt she would use.
Moving from the current measure of “public sector net debt, excluding the Bank of England” to a “public sector net financial liabilities” could allow 53 billion pounds of extra borrowing for investment, the IFS estimated.
Britain borrowed 121.7 billion pounds in the 2023/24 financial year, equivalent to 4.1% of GDP.
Reverting to a debt measure which includes the BoE’s shrinking bond portfolio – would add 16 billion pounds of fiscal headroom – while targeting the broader notion of ‘public sector net worth’ could add 58 billion pounds, the IFS said.
Britain’s finance ministry declined to comment on the options but said the budget would be based on “robust fiscal rules”.
The Organisation for Economic Co-operation and Development said this week the self-imposed targets hamper investment that might boost the economy and make debt more manageable in the long run.
Michael Krautzberger, global chief investment officer of fixed income at Allianz Global Investors, said markets might not worry if extra borrowing was for productive investment.
“But on the other side, you also need to be careful to show the market that you are not just opportunistically changing the rules,” he said.
Royal London Asset Management said there were jitters among investors.
“The market is nervous that Labour will shift the fiscal goalposts and borrow even more at a time when markets are struggling to digest the already heavy supply of UK bonds,” said Ben Nicholl, a senior Royal London fund manager.
($1 = 0.7471 pounds)
(Reporting by David Milliken）
