A leading economic expert has cautioned Shadow Chancellor Rachel Reeves over her plans to borrow billions to fund new infrastructure projects in the UK.
Paul Johnson, the Director of the Institute for Fiscal Studies (IFS), has warned that Reeves’ proposals could have severe consequences for the markets, drawing comparisons to the turmoil caused by former Prime Minister Liz Truss’s ill-fated 2022 mini-Budget.
That plan, which included unfunded tax cuts, triggered a dramatic collapse in the gilt market and a sharp drop in the value of the British pound.
With the government currently reviewing its fiscal rules to potentially allow for increased borrowing, the move could unlock up to £50 billion for new spending. However, Johnson has expressed deep concerns about the potential fallout.
He described the plan as “extremely hard” and “very uncertain,” highlighting the challenge of controlling how much the government can borrow. “The amount the government can borrow is really set by the markets who set the interest rates,” Johnson stated, noting that higher interest rates would raise the cost of borrowing.
Markets Could Be ‘Spooked’ By Debt Plan
Paul Johnson urged caution, suggesting that any effort to calm market fears by rebranding or redefining the nation’s debt would likely be ineffective. “You might be able to reassure the markets by redefining our debt,” Johnson said. “But I don’t think you are going to pull the wool over people’s eyes by redefining debt.”
Even if Reeves were to secure an additional £50 billion for infrastructure projects, Johnson warned it could be difficult to sell that debt at a good value without alarming financial markets.
He emphasized that borrowing on such a large scale would likely trigger unease among investors. “If you only used £10 billion of that, then it would be less scary,” he added, implying a smaller borrowing figure might be more manageable and less likely to lead to market volatility.
Despite the warnings, Downing Street dismissed comparisons to the economic chaos triggered by Truss’s mini-Budget. Officials insist the government is committed to restoring stability, with Prime Minister Rishi Sunak promising that the country would stay on course for economic recovery.
A spokesperson for Sunak said, “The government has made clear that one of the first steps of this government is to restore economic stability. It will absolutely deliver on that.”
Nonetheless, unease continues to simmer in financial circles, especially after a Treasury research paper from December resurfaced, warning of the potential dangers of altering the UK’s fiscal framework.
According to the paper, even a modest fiscal loosening — equivalent to one percent of GDP — could push up interest rates by as much as 1.25 percent. It further warned that increasing borrowing by £25 billion per year could see interest rates climb between 0.5 and 1.25 percent.
Chancellor Jeremy Hunt, however, is reportedly planning to proceed with the fiscal changes, despite the Treasury’s concerns. Whitehall insiders claim that Hunt views these adjustments as critical to unlocking the funds needed to deliver on key Labour promises.
The debate over the country’s fiscal future comes at a time when the UK government is under increasing pressure to address rising debt, economic instability, and the need for growth. How Reeves’ fiscal strategy plays out could well shape the next phase of the country’s economic journey.
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