Government borrowing costs rise ahead of Reeves’ first Budget

The cost of Government borrowing increased on Thursday following speculation Rachel Reeves could change debt rules to spend billions more on investments.

The Chancellor is widely expected to announce a technical change in the way debt is measured when she delivers her Budget on October 30.

The prospect of tens of billion in extra state borrowing sent gilt yields up by as much as eight basis points on Thursday.

It is thought this could see the Bank of England rein in cuts to interest rates, impacting UK gilts by sending prices lower, which conversely causes its yield to rise.

Gilts were also said to be under pressure after Bank governor Andrew Bailey said on Wednesday that there were still questions over whether elements of inflation may remain stubborn in the economy.

The Guardian reported that the Chancellor will confirm that next week’s Budget will include a new way to assess the UK’s debt.

The Treasury would not comment on speculation ahead of the Budget.

But Ms Reeves used a Financial Times article to say that her fiscal rules would “make space for increased investment”.

The bond market reaction could also have been influenced by comments from Mr Bailey, who suggested that inflation is coming down faster than expected during an appearance in Washington.

Shadow exchequer secretary Gareth Davies said: “Before the election, Rachel Reeves promised that she would not ‘fiddle’ the fiscal rules, and now it seems she is going to do exactly that.

“Remarkably she is announcing this not to Parliament, but to the IMF in advance of the Budget.

“This is already having real world effects, with borrowing costs rising. This uncertainty over additional borrowing risks interest rates staying higher and for longer. It’s families up and down the country who would pay the price.”

Writing in the Financial Times, Ms Reeves said her fiscal rules would be “the rock of stability at the core of my Budget”.

Labour’s 2024 election manifesto said Ms Reeves would follow two rules: The current budget would be in balance so that day-to-day costs are met by revenues.

The second rule is that debt must be falling as a share of the economy by the fifth year of the economic forecast.

Ms Reeves said: “My fiscal rules will do two things. The first and most important: my stability rule will mean that day-to-day spending will be matched by revenues.

“Given the state of the public finances and the need to invest in our public services, this rule will bite hardest.

“Alongside tough decisions on spending and welfare, that means taxes will need to rise to ensure this rule is met. I will always protect working people when I make these choices, while taking a balanced approach.

“Crucially, my stability rule will also cover the interest on our national debt and unlike the previous government I won’t cut capital budgets to make up for shortfalls in the day-to-day running costs of departments.

“My second fiscal rule, the investment rule, will get debt falling as a proportion of our economy.

“That will make space for increased investment in the fabric of our economy, and ensure we don’t see the falls in public sector investment that were planned under the last government.”

According to the Guardian, a senior Government source said that she will target public sector net financial liabilities (PSNFL) as her new benchmark for Government debt rather than the current measure of underlying public sector net debt.

A shift to PSNFL would give her greater headroom to meet her debt reduction target, because it includes a wider mix of state assets and liabilities – notably including expected student loan repayments to offset some of the liability.

Had PSNFL been used as the debt target in the March 2024 Budget, the “headroom” – the margin by which the fiscal rule is met – would have increased by £53 billion according to the Institute for Fiscal Studies.

Liberal Democrat Treasury spokeswoman Daisy Cooper said: “The Chancellor must invest any extra borrowing wisely and that should start by fixing the previous Conservative government’s legacy of crumbling hospitals and GP practices that plague our communities.”

Ms Reeves’ confirmation that taxes will rise to meet her day-to-day spending needs came as Sir Keir Starmer insisted there was no reason for entrepreneurs to quit the UK.

With speculation the Government could raise capital gains tax, putting off business start-ups and foreign investors alike, Sir Keir played down concerns about the Budget’s impact.

Asked if he thinks entrepreneurs may want to leave the UK following the reported tax increases, Sir Keir told reporters: “There is no reason for them to.”