A top thinktank director has warned Rachel Reeves she could spook the markets if she presses ahead with a plan to borrow billions of pounds to pay for new infrastructure in the UK.
The warnings from Paul Johnson of the Institute for Fiscal Studies (IFS) have echoes of the calamity faced by Liz Truss, who sparked gilt market freefall and a run on sterling after introducing unfunded tax cuts in her 2022 mini-Budget.
The government is considering changing its fiscal rules to give it more room to borrow, which could open up £50 billion of extra spending.
But Mr Johnson warned that the plan “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, he urged Ms Reeves 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 warned: “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 £50 billion “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 £10 billion of that then it would be less scary.”
On Tuesday, Downing Street dismissed concerns that a potential change to the borrowing rules could trigger a Liz Truss-style meltdown.
No 10 insisted the government would “absolutely deliver” on its pledge to restore economic stability amid speculation Rachel Reeves is preparing to overhaul the fiscal regime to unlock billions in additional spending.
This comes just days after a resurfaced Treasuryresearch paper from December suggested that rewriting the UK’s fiscal rules could increase the cost of debt.
Despite the warnings, the Chancellor is said to be planning to press ahead with the plans, Whitehall sources told The Guardian.
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 spokesman 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.”
The Treasury paper warned a “fiscal loosening” of just one 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 £25 billion could cause interest rates to surge by between 0.5 and 1.25 per cent.
The Treasury has been contacted for comment.