Britain’s borrowing costs rose on Thursday in anticipation of Ms Reeves’ decision to rewrite the UK’s debt rules, with the spread between British and German borrowing costs now at its widest for over a year.
The yield on UK bonds – the return the government promises to pay buyers of its debt – rose to as much as 4.28pc on Thursday.
UK bond yields have risen in stark contrast to European markets, where debt costs are falling ahead of expected interest rate cuts by the European Central Bank.
While UK interest rates are also projected to fall again as soon as next month, some mortgage lenders have raised the cost of borrowing amid uncertainty ahead of the October 30 statement.
The IMF also urged Ms Reeves to exercise caution over switching the UK’s debt rules to reflect the benefits of investment.
Helge Berge, deputy director of the IMF European department, said that while borrowing to invest was beneficial when done responsibly, he added that changing debt rules did not give economies licence to borrow: “This needs to be looked at carefully in any of these circumstances. Since assets come with revenue streams that can be uncertain, a certain degree of conservatism when looking at this is helpful.”
Ms Truss’s mini-budget spooked financial markets and sent mortgage costs soaring after she announced £45bn of unfunded tax cuts in 2022 that were mostly reversed by Mr Hunt.
But Ms Reeves maintained she will not embark on a borrowing binge as she seeks to fund a series of infrastructure investments.
The Chancellor 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 for our country and for taxpayers.”
However, she vowed to plough on with a plan to borrow to invest, adding that it was important to “free up the money … to invest in things or get a return for taxpayers. Our growth performance has been very poor.”
‘Stability rule’
Ms Reeves announced that the government would have two self-imposed borrowing goals, including a “stability rule” that requires her to bring day-to-day spending back into balance within five years. A second “investment rule” will say she must get debt falling by the end of the parliament.
Her new target measure – known as public sector net financial liabilities – is already forecast by the Office for Budget Responsibility (OBR) in its twice-yearly assessment of the public finances.
In March, its forecasts showed that targeting this measure would see debt as a share of GDP fall every year to 78.7pc in 2028-29, from 80.6pc in 2027-28, or more than £50bn in cash terms.
This compares with predecessor Jeremy Hunt’s headroom of just £8.9bn under the existing rules, which see debt falling only marginally from 93.2pc of GDP to 92.9pc in 2028-29.
The rule will reflect the benefits of investment as well as the cost. It would also strip out the impact of rising student debt. Switching to this measure would also allow Ms Reeves to borrow for her National Wealth Fund.