After weeks of speculation, Reeves is set to confirm that she will amend Britain’s debt rules to raise another £57billion to spend on long-term infrastructure projects. Which is exactly what she promised NOT to do during the election.
Oh well, there goes another one.
Yup, Labour is going on another borrowing spree, with taxpayers ultimately footing the bill although Reeves won’t sell it like that.
She’s expected to tell the International Monetary Fund that next week’s Autumn Budget will include a fresh method for assessing the UK’s national debt.
This jazzy new accounting method will suddenly make the debt look smaller. And when it does, a heap of extra cash will appear and Reeves will spend it.
It’s almost as if she’s finally found that magic money tree, but in reality she’s only playing with numbers, and taking an almighty punt with our money.
Labour’s 2024 general election manifesto said Reeves would follow two rules. First, the current budget would be in balance, with day-to-day spending met by revenues.
Second, the national debt must be falling as a share of the economy by the fifth year of the economic forecast.
That’s the rule Reeves is ditching, by changing the definition of debt.
She’ll do this by sticking a value on all the things the government “owns”, such as roads, parks and even unpaid student loans, and offsetting these against the money it owes.
The debt will still be there of course – plus the extra £57billion Reeves plans to spend – we’ll just be adding it up differently.
This is a rule Reeves called “iron-clad” in the election, but hey, that was months ago.
Former PM Rishi Sunak has claimed that Reeves herself had described this as “fiddling the figures”. It’s as good a phrase as any.
The respected Institute for Fiscal Studies is also concerned saying that “it is hard to avoid the suspicion” that Labour was tempted to change the rule “by the fact that it would allow for significantly more borrowing for investment”.
Er, you bet.
Reeves certainly wouldn’t be changing the rules if it made the debt look bigger and allowed her to spend less.
Labour doesn’t care what voters think. But they do care about the government bond market, which keeps a close eye on these things.
The bond market is the bedrock of the financial system. The UK borrows hundreds of billions each year by issuing bonds to investors all over the world who want a low-risk return.
Anything a bit dodgy, like former Tory PM Liz Truss’s chaotic mini-Budget in September 2022, scares the hell out of them. And they demand a lot more interest for lending us money.
That’s why mortgage rocketed past 6% when Truss announced a heap of tax cuts funded by borrowing, and she was out of Number 10 after just 49 days.
Nobody messes with the bond market, especially a country like the UK that is drowning in debt, owing a staggering £2.6trillion in total.
That’s roughly the size of our entire economic output for a year.
The bond market is already looking spooked by Reeves’ shenanigans. We know that because our borrowing costs are rising on the news of her magic trick.
UK gilt yields fell to 3.75% last month, as investors anticipated lower inflation and interest rates. This morning they hit 4.2%. That’s a big jump for bond yields, which are not supposed to be volatile.
Pantheon Macroeconomics warned yesterday that interest rates would be up to 0.5% higher over the next financial year as a result.
This could add £1,250 a year to the cost of servicing at £250,000 mortgage. That’s an extra £105 a month.
Reeves will justify the move by saying she’s borrowing to invest, rather than to cover day-to-day spending. Up to a point she’s right. The UK hasn’t invested anywhere near enough for years.
If her luck holds, the money raised will more than pay for itself, by getting the economy moving.
If it doesn’t, it’s Liz Truss all over again. And nobody in their right mind wants that.