Investing.com — UK Treasury officials are concerned that Prime Minister Andy Burnham’s plans to use flexibility within Britain’s fiscal rules to increase investment could unsettle financial markets and push government borrowing costs higher, Bloomberg reported.
Burnham said after becoming prime minister on July 20 that his government would retain the existing fiscal framework but use “any flexibility” available within it.
The approach could permit substantially higher borrowing for priorities including housing, transport and defence. Officials are concerned that investors may view the arrangement as lacking a binding constraint, despite the government formally remaining within its fiscal rules.
Britain’s 2024 fiscal framework excludes capital spending from the rule requiring tax revenue to cover day-to-day expenditure. Borrowing channelled through public financial institutions as loans to private operators can also be offset by the resulting financial assets under the government’s preferred debt measure.
The main formal constraint is the cost of servicing the added debt. The Resolution Foundation estimated that each £10 billion of new borrowing would add about £500 million to annual interest costs.
Britain already has the highest government borrowing costs among Group of Seven economies. Public debt is close to 100% of gross domestic product, with the government spending around £110 billion annually to service £2.9 trillion of debt.
Chancellor John Healey has used the term “scope” rather than flexibility and indicated that faster investment may also require welfare cuts and changes to departmental budgets.
“Fiscal discipline is the bedrock of economic stability and national security,” a Treasury spokesperson said, adding that the government would meet its rules and maintain a buffer against uncertainty.
Officials are considering possible safeguards to reassure investors, including new limits within the existing framework.
Healey is also preparing for the October 28 budget, with weaker growth and higher inflation linked to the Iran war expected to have reduced the government’s fiscal headroom.
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