A significant increase in British public borrowing to enhance investment may not be without risks, a think tank has cautioned ahead of the new government’s first budget. Markets are closely monitoring the extent and purpose of this additional government borrowing.
Finance Minister Rachel Reeves stated this week that it was “time that the Treasury moved on from just counting the costs of investments, to recognising the benefits too.”
The non-partisan Institute for Fiscal Studies (IFS) emphasized that Reeves would need to justify any increase in borrowing for additional public investment.
“A large increase in borrowing would not be risk-free,” noted IFS senior research economist Isabel Stockton. “Hiding behind a technicality is not enough.”
This warning comes in the wake of former Prime Minister Liz Truss’s decision in 2022 to bypass checks on the impact of her substantial tax cut proposals, which resulted in a bond market crisis that ultimately led to her resignation.
British public debt has surged to 100% of annual economic output, up from 64% in 2009/10. Reeves has indicated that she will maintain the existing target for public debt to ensure it falls between the fourth and fifth years. However, she did not clarify which measure of debt would be employed.
Shifting from the current measure of “public sector net debt, excluding the Bank of England” to “public sector net financial liabilities” could potentially allow for an additional £53 billion in borrowing for investment, according to the IFS.
Britain borrowed £121.7 billion in the 2023/24 financial year, which is equivalent to 4.1% of GDP. Reverting to a debt measure that includes the BoE’s diminishing bond portfolio would provide £16 billion of fiscal flexibility, while targeting the broader concept of ‘public sector net worth’ could yield an additional £58 billion, the IFS stated.
The finance ministry declined to comment on these options but affirmed that the budget would adhere to “robust fiscal rules.”