New UK chancellor Rachel Reeves is set to deliver her first Budget on October 30, when she is expected to stick to the Labour Party’s manifesto commitments of a balanced Budget and lowering the country's debt-to-GDP ratio.
Although these sound standard and reasonable ideas, Reeves may also go one step further and adjust the government’s fiscal rules to free up billions in infrastructure investment — funded by borrowing, of course.
Reeves told delegates at last month’s Labour Party conference that “It is time the Treasury moved on from just counting the costs of investment in our economy to recognising the benefits too.”
She could do this by changing the way the UK’s debt is measured to account for the value of government assets, like schools, hospitals or prisons.
To an extent, this makes sense — money spent on such projects does not suddenly vanish into thin air once it leaves the government’s coffers. Doing so could free up £57bn of borrowing and investment over the next five years, according to the Institute for Public Policy Research think tank.
However, the Gilt market might not look so kindly upon a rapid increase in government borrowing. In fact, the yield on the 10 year Gilt is at its highest since Labour's June parliamentary election victory, having closed at 4.23% on Thursday, according to Tradeweb. Since mid-September, as talk of Reeve’s first Budget heated up, the yield has climbed 50bp.
As former prime minister Liz Truss and her chancellor Kwasi Kwarteng found just over two years ago, the so-called ‘left-wing economic establishment’ does not look too fondly upon fiscal recklessness and higher borrowing.
Gilt yields soared after Truss and Kwarteng's disastrous mini-Budget, stuffed full of Gilt-fuelled tax cuts on September 23, 2022. That forced the Bank of England to intervene in the Gilt market and Truss to step down after only 45 days as PM.
Of course, Reeves should have an easier time with her mantra of “invest, invest, invest” rather that Truss and her chancellor’s borrowing spree to cut taxes.
Reeves must tread carefully if she wants to ensure her tenure as chancellor lasts longer than a lettuce.
As her boss Keir Starmer has already found out, after his wardrobe was found stuffed full of clothes donated by a political supporter, the nascent Labour administration's love of a freebie has put it in hot water with the public — it mustn't add the wrath of the market on top.