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The government has been warned that a potential change to borrowing rules could spook the markets and trigger a Liz Truss-style meltdown.
While No 10 has insisted it will “absolutely deliver” on its pledge to restore economic stability, financial experts warned the plans could trigger investor backlash.
This comes amid speculation chancellor Rachel Reeves is preparing to overhaul the fiscal regime to unlock £50bn of extra spending.
Ms Truss sparked gilt market freefall and a run on sterling after introducing unfunded tax cuts in her 2022 mini-Budget.
Nigel Green, chief executive of deVere group – one of the world’s largest independent financial advisory organisations – told The Independent: “In the weeks leading up to the Budget, UK gilt yields – widely seen as a barometer of investor confidence – have surged from 3.75 per cent to around 4.2 per cent.
“This rise, a clear signal that investors are offloading government debt, indicates growing concerns that the chancellor may prioritise fiscal stimulus over long-term sustainability.
“The response recalls the shockwaves from Truss’s controversial fiscal plan in September 2022, which triggered a massive sell-off of UK gilts, rattling markets and forcing emergency interventions.”
He added: “The rise in gilt yields shows that investors are already pricing in the possibility of increased borrowing, and if Reeves doesn’t tread carefully, we could see a repeat, albeit to a lesser degree, of the panic that followed Truss’s mini-Budget.”
Paul Johnson, director of the Institute for Fiscal Studies, echoed Mr Green’s remarks, warning that a prospective plan to borrow billions of pounds to pay for new infrastructure in the UK “is firstly extremely hard and secondly very uncertain”.
“Thirdly, if you can do that it doesn’t tell you anything much about how much the government can actually borrow. The amount the government can borrow is really set by the markets who set the interest rates, the cost of the borrowing,” he added.
Speaking to BBC Radio 4’s Today programme, Mr Johnson urged Ms Reeves to avoid “spooking the markets”, warning: “At the moment we have to pay an enormous amount of interest on our debt. You might be able to reassure the markets by redefining our debt.”
But he added: “I don’t think you are going to pull the wool over people’s eyes by redefining debt.”
He suggested that even if Ms Reeves tried to use an extra £50bn “that would cause quite a lot of problems in that could you really sell that debt at a good value? Would the markets get spooked? If you only used £10bn of that then it would be less scary.”
But the prime minister’s official spokesperson rejected claims that the government’s plans would trigger uncertainty in the markets.
Asked whether the fiscal rules set out in the Labour manifesto would stay in place after the Budget amid suggestions a change could spark Truss-style chaos, the prime minister’s official spokesperson said: “Obviously, I wouldn’t accept that characterisation.
“The government has made clear that one of the first steps of this government is to restore economic stability in the Budget. It will absolutely deliver on that, delivering on the robust fiscal rules that were set out in the manifesto.”
Despite the warnings, the chancellor is said to be planning to press ahead with the plans, Whitehall sources told The Guardian.
It comes just days after a resurfaced Treasury research paper from December suggested that rewriting the UK’s fiscal rules could increase the cost of debt.
The Treasury paper warned a “fiscal loosening” of just 1 per cent of GDP could lead to a “peak increase in interest rates” of as much as 1.25 per cent.
The document warns every increase in yearly borrowing of £25bn could cause interest rates to surge by between 0.5 and 1.25 per cent.
The Treasury has been contacted for comment.
