Chancellor Rachel Reeves commits to new fiscal rules amid concerns of a potential borrowing spree, signalling a pivotal moment for the UK economy

Chancellor Rachel Reeves is under pressure as she prepares for her maiden Budget speech on October 30, signalling a potential shift in the UK’s fiscal strategy that could allow for a £50 billion borrowing spree. This announcement has prompted significant concern among financial markets, which are still reeling from the repercussions of Liz Truss’s controversial mini-Budget last year.

In a move aimed at recalibrating how debt is managed, Reeves plans to revise the existing debt calculation methods, including investment benefits. This approach, however, has triggered apprehension about the ramifications of increased borrowing. Speaking on Thursday, Reeves insisted that this plan would enable the government to stimulate growth without resorting to short-term fiscal irresponsibility.

Yet, not everyone is convinced. Former Chancellor Jeremy Hunt cautioned that increased borrowing could lead to elevated mortgage costs for families, asserting, “The markets are watching.” Hunt’s remarks underscore the delicate balance Reeves must strike between fostering economic growth and maintaining investor confidence.

The backdrop to this debate is the turbulent financial climate following Truss’s fiscal missteps, which saw a bond market meltdown triggered by her announcement of £45 billion in unfunded tax cuts. Traders remain wary, and any signal of fiscal recklessness could send ripples through the mortgage market. Hunt remarked that Treasury officials had consistently warned that higher borrowing would likely result in prolonged elevated interest rates, negatively impacting homeowners.

Reeves, undeterred by these warnings, addressed reporters during the International Monetary Fund (IMF) annual meetings in Washington, asserting, “If we continued on that path, we’d be embracing a path of decline. It’s not a path I want for Britain.” She framed the debate as a choice between investment and decline, championing her vision for an economically vibrant future.

To alleviate concerns about a reckless borrowing spree, the Chancellor indicated she would implement “guardrails” to ensure responsible fiscal management. “We will not be using all of the headroom available,” she clarified, signalling her intent to avoid the pitfalls of unchecked borrowing.

This commitment includes a fixed target for reducing debt as a share of the economy by the end of the current parliamentary term. Previous governments had set only rolling targets, which critics argued lacked credibility. Reeves aims to create a more structured and achievable framework for debt reduction, aligning her strategy with public expectations for fiscal responsibility.

BBC

As the countdown to next week’s budget continues, Chancellor Rachel Reeves has confirmed her intention to amend the government’s fiscal rules, allowing for an additional £20 billion in public sector investment. According to the Financial Times, this move is designed to avert the anticipated decline in public sector funding that was projected under the previous administration. Reeves stated that the changes would ensure a more stable investment environment for the nation.

However, her proposals have sparked significant concern among financial experts and political figures alike. The Daily Telegraph reported that former Chancellor Jeremy Hunt cautioned that Reeves’ plans could lead to higher interest rates remaining in place for an extended period. Hunt, who succeeded Kwasi Kwarteng following the financial upheaval triggered by the September 2022 mini-budget, remarked, “The markets are watching,” highlighting the sensitive nature of government borrowing in the current economic climate.

The Daily Mail echoed this sentiment, warning that Reeves’ fiscal adjustments might “punish” mortgage holders if increased borrowing leads to a rise in interest rates. This concern is particularly poignant for families struggling with mortgage payments in a volatile financial landscape.

Furthermore, the Times featured a warning from Labour stalwart and former Work and Pensions Secretary Lord Blunkett, who expressed grave concerns over potential plans to impose national insurance contributions on employers’ pension contributions. He argued that such a move could compel employers to reduce their pension contributions, subsequently harming living standards for retirees.

In a related development, Prime Minister Keir Starmer has opened the door to discussing non-financial reparations for Britain’s historical involvement in the slave trade. This shift in stance comes amid mounting pressure from Caribbean nations for reparations to be addressed at the upcoming Commonwealth Heads of Government Meeting in Samoa. A spokesperson for Downing Street clarified that the government does not support direct payments but is willing to consider alternative forms of reparative measures.

The interplay between fiscal policy and social responsibility remains a critical issue as the government navigates its approach to investment, economic stability, and historical accountability.

THE GUARDIAN

Chancellor Rachel Reeves has announced a significant commitment to reversing substantial cuts in the UK’s public investment in her upcoming budget, aiming to allocate up to £50 billion for infrastructure development. This move is part of her broader strategy to revise fiscal rules governing government spending, a shift she confirmed during her trip to the International Monetary Fund (IMF) annual meetings in Washington.

Reeves stated her determination to overhaul the methods the Treasury uses to assess budget shortfalls, ensuring that public investment does not fall further behind levels seen in other major economies. Experts suggest that the new fiscal rules could potentially unlock over £50 billion for public infrastructure projects over the next five years, compared to the previous Conservative government’s plans.

During a press briefing, Reeves indicated, “I can confirm today that I will be changing the way that we measure debt in the budget statement next week, but I’ll set out the details of that to parliament.” Although she did not specify the exact measures to be employed, a senior government source revealed that the focus would likely be on public sector net financial liabilities (PSNFL), which take into account the government’s total financial assets and liabilities. This adjustment aims to provide greater flexibility for borrowing aimed at long-term infrastructure investments.

In an effort to assuage concerns about reckless spending reminiscent of Liz Truss’s 2022 mini-budget, Reeves emphasised her commitment to maintaining strict limits on departmental budgets. She clarified, “It’s really important for the sustainability of public finances that we give confidence to markets that we’re not borrowing to pay for the day-to-day functioning of government.” Instead, she outlined that the additional funds would be used strategically to yield long-term benefits for the nation and taxpayers, rather than for immediate tax cuts.

In anticipation of the announcement, government borrowing costs increased, reflecting market apprehension about the implications of rising UK debt levels. The yield on UK government bonds rose to over 4.2% in early trading before stabilising, marking a stark contrast to declines in borrowing costs for other nations, such as the United States. Analysts from Deutsche Bank noted that while the increase in yields was relatively modest compared to prior pre-budget periods, including Truss’s announcement, it nevertheless signalled market sensitivity to Reeves’s forthcoming budget plans.