Rachel Reeves was hit with a huge row just days before the Budget over whether borrowing billions more would push up mortgage bills for longer for millions of households across Britain.
The Chancellor has unveiled new fiscal rules which are expected to be used to borrow tens of billion more for investment schemes in transport and other infrastructure projects in a bid to boost the UK’s sluggish economic growth.
The move sparked immediate accusations from her predecessor that putting more on the nation’s credit card would put upward pressure on interest rates for longer which feeds into higher mortgage rates.
Shadow Chancellor Jeremy Hunt said: “Rachel Reeves announced her plans to fiddle with her fiscal rules and borrow up to £50 billion more to fund further reckless spending.
“Let me clear; the advice I received consistently whilst Chancellor was that any additional borrowing would mean higher interest rates for longer.
“Meaning if the Chancellor goes ahead with £50 billion of extra borrowing there will be misery for millions of mortgage holders across the country.”
But Treasury minister James Murray flatly rejected the Conservative claim.
Asked whether families with mortgages would be punished by the relaxation of the borrowing rule, he told Times Radio: “No, what’s really important about the fiscal rules is that this is about bringing stability back into the economy.
“It’s about getting the economy growing and that is crucial for making people better off and keeping mortgages and taxes as low as possible.
“If you look at the way that markets will react to the Budget next week, they will see the first fiscal rule, the stability rule, and they will see that that is promising day-to-day spending paid for entirely from tax receipts.
“They will see the second rule, the investment rule, giving a commitment to getting debt falling as a share of GDP and they will see guardrails put in place.”
But pressed whether he could give any commitment to households with mortgages, he responded: “Jeremy Hunt when he was Chancellor had an entirely different approach to the economy, with different fiscal rules...”
The Chancellor is due to unveil a series of tax hikes in the Budget on October 30, many of which will hit London hard.
She is expected to increase National Insurance on employers possibly on their pension contributions, despite a warning by former Labour Cabinet minister Lord Blunkett against the move, to raise capital gains tax and inheritance tax, freeze the thresholds for paying income tax for another two years, and make changes to stamp duty.
Pensioners, the wealthy and people with significant shareholdings and landlords appeared to be in the Chancellor’s sights as Sir Keir Starmer and ministers gave their definitions of “working people” who would not bear the brunt of the tax rises.
Ms Reeves is seeking to put together a package of some £40 billion in tax rises and public spending cut, to address an alleged £22 billion black hole in the public finances which she says she inherited from the Tories, a claim they deny, and also to plough billions more into improving some priority public services such as the NHS.
She announced the changes to her fiscal rules at a meeting of the International Monetary Fund in Washington, explaining that they would “make space for increased investment”. The Financial Times reported this would allow her to borrow around £20billion a year more.
Labour’s 2024 election manifesto said Ms Reeves would follow two rules: The current budget would be in balance so that day-to-day costs are met by revenues.
The second rule is that debt must be falling as a share of the economy by the fifth year of the economic forecast.
Ms Reeves is expected to target public sector net financial liabilities (PSNFL) as her new benchmark for government debt rather than the current measure of underlying public sector net debt.
A shift to PSNFL would give her greater headroom to meet her debt reduction target, because it includes a wider mix of state assets and liabilities, notably including expected student loan repayments to offset some of the liability.
