Families were last night warned to brace for mortgage hikes as Rachel Reeves tore up Treasury rules to pave the way for a massive borrowing binge in next week’s Budget.
In a major U-turn, the Chancellor confirmed she will adopt a new definition of public debt which will allow her to borrow up to £50 billion extra – equal to £1,750 for every household in the country.
As Ms Reeves warned that her tax rises – estimated at up to £35 billion – would ‘bite hard’, her Tory predecessor, Jeremy Hunt, said the scale of borrowing risked pushing up interest rates and ‘punishing families with mortgages’.
‘The consistent advice I received from Treasury officials was always that increasing borrowing meant interest rates would be higher for longer,’ he said. ‘What’s even more remarkable is that the Chancellor hasn’t seen fit to announce this major change to the fiscal rules to Parliament. The markets are watching.’
Mr Hunt accused his Labour successor of ‘treating the public with contempt by breaking her promises during the Election’.
In a major U-turn, Rachel Reeves confirmed she will adopt a new definition of public debt which will allow her to borrow up to £50 billion extra – equal to £1,750 for every household in the country
Reeves’ predecessor Jeremy Hunt , said the scale of borrowing risked pushing up interest rates and ‘punishing families with mortgages’ (file image)
The Chancellor said she would use her expanded borrowing powers to invest in infrastructure and key industries such as green energy and the life sciences to boost growth. She insisted that Treasury ‘guardrails’ would be put in place to ensure value for money – and to reassure nervous financial markets.
The potential scale of Labour’s plans would exceed the £45 billion of ‘unfunded’ tax cuts in Liz Truss’s disastrous 2022 mini-Budget which sent government borrowing costs soaring.
Gilt yields, which reflect government borrowing costs, rose to 4.2 per cent yesterday – the highest level since the election – on the back of market jitters about Labour’s spending plans at a time when the UK’s £2.8 trillion national debt is already close to 100 per cent of GDP.
Nick Winters, a partner at accountants Blick Rothenberg, said ‘tinkering’ with the fiscal rules could give the Chancellor a ‘big win’ next week, but it was likely to be temporary and could damage the economy in the long term.
‘This proposal gives the impression that Labour is tweaking a large spreadsheet to attempt to meet all of their promises,’ he said. ‘But unlike a spreadsheet, there are only so many tweaks our economy can take before it crumbles.’
Tory Treasury spokesman Gareth Davies said: ‘Before the election, Rachel Reeves promised that she would not ‘fiddle’ the fiscal rules, and now it seems she is going to do exactly that.
‘This is already having real-world effects, with borrowing costs rising. This uncertainty over additional borrowing risks interest rates staying higher and for longer. It’s families up and down the country who would pay the price.’
Front facade of the Bank of England, in Threadneedle Street. This iconic financial institution is responsible for setting interest rates in the UK
Families were last night warned to brace for mortgage hikes as Rachel Reeves tore up Treasury rules to pave the way for a massive borrowing binge in next week’s Budget (file image)
During the election campaign, Labour pledged to stick with the existing ‘fiscal rules’, saying they were ‘non-negotiable’ and would apply to ‘every decision taken by a Labour government’.
But yesterday Ms Reeves said they had proved too restrictive.
She said the existing debt rules would see the UK ‘continue on this path to decline’, adding: ‘If we continued on that path we would miss out on other opportunities and other countries would seize them.
‘Under the plans that I have inherited from the previous Conservative government, public sector net investment as a share of our economy was due to decline steeply during the course of this parliament.
‘I don’t want that path for Britain when there are so many opportunities in industries from life sciences to carbon capture, storage and clean energy to AI and technology, as well as the need to repair our crumbling schools and hospitals.’
Her decision clears the way for a mega-Budget next week which will see taxes, spending and borrowing all soar.
At the IMF annual meeting in Washington DC yesterday, Ms Reeves said her revised fiscal rules would provide a ‘rock of stability at the core of my Budget’.
Her first rule, dubbed the ‘stability rule’, remains largely unchanged, and requires day-to-day spending to be covered by taxes.
But with Labour poised to inject tens of billions into public services, this is set to require huge tax rises. Writing in the Financial Times, the Chancellor acknowledged that ‘this rule will bite hardest’.
She added: ‘Alongside tough decisions on spending and welfare, that means taxes will need to rise to ensure this rule is met.’
Her second rule, the ‘investment rule’, will commit the Government to reducing debt as a proportion of national income by the end of the parliament. But tweaking the definition of debt means she will be able to borrow as much as £50 billion more than under the previous rules.
Rachel Reeves participates in IMF/World Bank Annual Meetings in Washington earlier on Thursday
Ms Reeves said: ‘I think it is really important to be clear about what this investment is for. It’s not to pay for day-to-day spending. It’s not to pay for tax giveaways. It’s to invest in things to get a long-term return.’
But her pledge to raise public investment back to 2.5 per cent of national income is certain to be seen by other Cabinet members as a green light for an investment splurge for Labour pet projects such as the NHS and housing.
The Office for Budget Responsibility’s Richard Hughes is understood to have signed off to the change to the debt rule known as Public Sector Net Financial Liabilities. But the Institute for Fiscal Studies has reservations.
There will be extreme concern in the City that once the genie of investment spending is released, it will be all but impossible to put it back.