Rachel Reeves’s “opportunistic” attempt to rewrite Britain’s fiscal rules ahead of the Budget risks causing a surge in interest rates, a leading think tank has warned.
The Institute of Fiscal Studies (IFS) said any move to alter the Chancellor’s self-imposed fiscal rules “would not be without risks”, which comes ahead of her maiden Budget in October.
Ms Reeves is considering the change to unlock up to £50bn for spending on large-scale projects such as roads and housing, as the Treasury seeks to “count the benefits of public investment and not just the costs of it”.
However, the IFS warned that if Labour borrowed an extra £50bn in 2028-29, the scale of the increase could have a “material impact on interest rates”.
The think tank said: “There is a risk that the Government is perceived to be making a change not for principled reasons, but for opportunistic ones – to allow for significantly more borrowing for investment without any need for tough choices elsewhere.”
The warning comes after the UK’s debt recently surged to 100pc of gross domestic product for the first time since the 1960s.
To increase debt levels further poses a risk, the IFS said, adding that the Government must also convince global investors that such investment would stimulate growth.
The think tank said: “A large fiscal expansion would not be without risks, and impacts of debt and debt servicing costs cannot be disregarded entirely. Ensuring that the investment funded by that borrowing is – and is widely seen to be – spent well will be crucial.”
The IFS warned that not all investment is automatically growth-enhancing, meaning Ms Reeves is required to make “sensible choices”.
Shadow chancellor Jeremy Hunt has called for the Office for Budget Responsibility to be allowed to block his successor from “fiddling the fiscal rules”.
Ms Reeves has two self-imposed rules for borrowing. The first says she can borrow for investment provided she brings day-to-day spending back into balance within five years, while the second dictates debt must be falling relative to the size of the economy after five years.
It is understood she is exploring how to relax the former to strip away the impact of rising student debt.
Isabel Stockton, senior research economist at the IFS, warned that the Government must explain why it wants to increase borrowing despite the risks.
She said: “It is crucial that the Government makes the case why these risks are worth taking, and how it will ensure the additional investment will be well spent. Hiding behind a technicality is not enough.”
Alan Monks, at JP Morgan, said the Chancellor has several ways in which she could tweak the fiscal rules, although he does not expect any radical changes.
He said: “It would be very risky for Labour to fully abandon a more conventional debt target, and we expect a more measured approach as it seeks to lift investment spending.”
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