UK Treasury officials worry that Prime Minister Andy Burnham's plan to use flexibility within Britain's fiscal rules could unsettle bond markets and push government borrowing costs higher. Burnham says his government will keep the existing fiscal framework but use "any flexibility" it allows to fund investment in housing, transport and defence. Chancellor John Healey is preparing the October 28 budget as officials weigh safeguards to reassure investors.
Treasury officials fear that Prime Minister Andy Burnham's plan to use flexibility within Britain's fiscal rules could unsettle bond markets and push government borrowing costs higher. Burnham said after becoming prime minister on July 20 that his government would retain the existing fiscal framework but use "any flexibility" available within it. That approach could permit substantially higher borrowing for priorities including housing, transport and defence.
A rule that bends without breaking
Britain's 2024 fiscal framework excludes capital spending from the requirement that tax revenue cover day-to-day expenditure. Borrowing channelled through public financial institutions as loans to private operators can also be offset by the resulting financial assets under the government's preferred debt measure. As a result, officials worry investors may view the arrangement as lacking a binding constraint, even though the government would formally remain within its fiscal rules.
The price of extra borrowing
The main formal constraint left is the cost of servicing the added debt. The Resolution Foundation estimated that each £10 billion of new borrowing would add about £500 million to annual interest costs. Britain already has the highest government borrowing costs among Group of Seven economies, with public debt close to 100% of gross domestic product. Currently, the government spends around £110 billion annually to service £2.9 trillion of debt.
Healey draws a different line
Chancellor John Healey has used the term "scope" rather than flexibility and indicated that faster investment may also require welfare cuts and changes to departmental budgets. A Treasury spokesperson said: "Fiscal discipline is the bedrock of economic stability and national security," adding that the government would meet its rules and maintain a buffer against uncertainty. Officials are considering possible safeguards to reassure investors, including new limits within the existing framework.
Healey is also preparing for the October 28 budget, with weaker growth and higher inflation linked to the Iran war expected to have reduced the government's fiscal headroom.
Source: Investing.com
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