The Labour government is stressing the “guardrails” at the heart of its tax, borrow and spend plans as it tried to reassure the City in the run-up to the Budget.
Treasury minister James Murray sought to ram home this message when he appeared on the Friday morning media round for the Government.
“What the markets will see next Wednesday when the Chancellor stands up in the House of Commons, they will see someone who will say ‘we are not going to borrow for day-to-day spending, we are going to get debt falling as a share of GDP, and we are going to put in place guardrails about investments to make sure they are delivering value for money’,” he told Sky News.
He stressed that this aimed to give “confidence” that the public finances were safe in Labour’s hands ahead of the Budget, which will include a string of tax rises which are expected to hit businesses, pensioners, the wealthy, landlords and people with significant shareholdings.
He insisted that the rules were being strengthened on day-to-day spending to avoid the economic chaos under the Tories, most notably the autumn 2022 “mini Budget”.
“This is about bringing stability back into the economy,” he argued.
His words echoed those of Rachel Reeves when she announced on Thursday a loosening of her debt fiscal rule to allow tens of billions more to be borrowed to invest in transport and other infrastructure projects in a bid to boost Britain’s miserly economic growth rate of recent years.
Speaking in Washington, at a meeting of the International Monetary Fund, the Chancellor stressed she would put in guardrails as she changes the country’s debt rule to “give markets confidence that there are rules around the investments we can make as a country”.
She also indicated she will confirm a tighter rule on spending on welfare, in Government departments, and on debt interest.
On the spending plans, she emphasised: “We will be putting in guardrails with the National Audit Office and Office for Budget Responsibility validating the investments that we’re making to ensure that we deliver value for money... and to give markets confidence that there are rules around the investments we can make as a country.”
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, though, is changing the definition of debt, to “make space for increased investment in the fabric of our economy”, with reports that this could be to the tune of some £20 billion more a year.
She 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.
The City has been growing increasingly jittery over recent weeks about a Labour borrowing splurge in the Budget.
The interest rate, or yield, on traded Government debt, known as gilts, has gone up sharply as investors grow wary of Ms Reeves’s intentions.
As borrowers take on more debt, the risk that they will not pay it back grows and investors demand a higher interest rate in return.
Although the UK is still seen as a very safe bet in global terms, investors are demanding more of a return because the level of borrowing taken on by the UK government has grown so large, roughly the same size as national GDP, after the triple crises of the financial crash, the pandemic and the energy spike.
Since mid-September the yield on the benchmark 10 year gilt has risen by around half a percentage point from around 3.75%, to close to 4.25% in recent days.
Yesterday the yield rose again by about 0.06%, or 6 basis points in City jargon, after the Chancellor made her comments yesterday about borrowing more to invest by changing the fiscal rules. However today the yield fell back again by 2 basis points to stand at 4.22%.
City economists say that Labour is likely to avoid a “Liz Truss event” that sends interest and mortgage rates spiralling as they did in Autumn 2022 after the mini-Budget so long as the independent watchdogs, the Office for Budget Responsibility and the National Audit Office are kept fully on board.
Nevertheless the rise in yields over the past month has already started to feed into the retail mortgage sector with several major lenders including Barclays and Halifax raising their fixed rate deals over recent weeks.
However, the fast improving outlook for inflation, which fell to 1.7% last month, should help to keep a lid on interest rates as the Bank of England prepares to cut borrowing costs again in November.
This is seen as a cast iron certainty in the City with a high probability of a second cut in December.
