Andy Burnham's potential plans to utilize fiscal flexibility for increased borrowing, aiming to free up over £9 billion per year for additional spending by 2031, are facing strong warnings from financial experts and former chancellors. They argue that bond markets will perceive this as a "ruse" and respond by increasing the cost of UK debt, making it a "credit card paid for by the taxpayers of tomorrow." This comes as the Prime Minister faces difficult financial decisions, including boosting sluggish economic growth and easing cost-of-living pressures, both exacerbated by the Iran war.
Former Conservative Chancellor Phillip Hammond stated that bond markets "will see straight through this ruse and price UK debt up accordingly." Similarly, James Hodgkinson of the Adam Smith Institute called the idea of borrowing paying for itself "the oldest line in the Treasury songbook." The Institute for Fiscal Studies (IFS) also expressed concerns, questioning if the benefits of extra borrowing would justify the increased costs. Jonathan Portes, an economist and former Treasury adviser, noted that while former Chancellor Rachel Reeves’ fiscal rules are an improvement, funding investments should be weighed against cuts to other spending or tax rises.
The proposed additional borrowing, which supporters claim could allow higher public investment without unsettling debt markets, is based on an interpretation of Rachel Reeves' fiscal rules for infrastructure, housing, and business support. However, concerns are high that the bond markets are on "red alert" for such moves. Ruth Gregory, Chief UK Economist at Capital Economics, suggests that while there might be some scope for borrowing, bond markets are nearing their tolerance limits, with long-term gilt yields already elevated. The current national debt is high and rising, making the UK more vulnerable to future shocks, and roughly £1 in every £12 of government spending is already on debt interest.
Capital Economics further estimates that Andy Burnham's spending pledges, including those on defense, social care, and council housebuilding, could amount to a bill of between £46 billion and £63 billion by the end of the decade, equivalent to 1.5% to 2% of GDP. Gregory estimates a ceiling of £15 billion for extra investment borrowing, but suggests the fiscal headroom is likely closer to £10 billion. She also expressed skepticism that all commitments would be realized, especially given Burnham's stance against raising income tax, national insurance, or VAT, and warned that aligning capital gains taxes with income tax rates could lead to a fall in receipts of £7 billion.
