Economy

UK’s Reeves Promises ‘Guardrails’ for Extra Borrowing in Budget, Reports Reuters

By William Schomberg

LONDON – British finance minister Rachel Reeves has announced plans to implement "guardrails" to manage additional borrowing for investment in her inaugural budget, aiming to reassure investors about an anticipated increase in public debt.

In an interview with the Financial Times, published late on Friday, Reeves emphasized the importance of making prudent, long-term investments while maintaining safeguards around such borrowing.

Reeves is set to present her first tax-and-spending budget statement on October 30, marking a significant moment for the new Labour government led by Prime Minister Keir Starmer. The government has committed to enhancing investment in key sectors like infrastructure and the transition to a net-zero economy to accelerate economic growth in the UK.

With public debt hovering around 100% of annual economic output, investors are keenly observing how much additional borrowing Reeves will pursue, particularly in conjunction with certain tax increases.

In recent weeks, British gilt yields have increased more than those of other government bonds, partly due to apprehensions about the possible scale of additional debt issuances. Simultaneously, warnings of a stringent budget have negatively impacted consumer confidence, casting a shadow over the early days of the new administration.

Both Reeves and Starmer are aware of the turmoil in Britain’s bond market encountered in 2022, following proposals for substantial, unfunded tax cuts from former Prime Minister Liz Truss, which ultimately led to her resignation.

Reeves indicated that the Office for Budget Responsibility (OBR) and the National Audit Office, the government’s spending watchdog, would carefully evaluate her public investment plans, which are designed to encourage private investment as well.

"We will ensure that investment truly stimulates growth and will consider the roles of various institutions, including the NAO and the OBR," she stated.

Reeves expressed her hope that the benefits of increased public investment over a timeframe longer than the OBR’s five-year forecasting period would be recognized.

While confirming her intention to revise the government’s fiscal debt rule to account for the advantages of investment rather than solely its costs, Reeves withheld specific details on how much additional spending these revisions might permit.

Moreover, she indicated that higher taxes are necessary to avoid cuts to already squeezed public finances as suggested by the previous Conservative administration.

"There won’t be a return to austerity," Reeves assured. "The goal of this budget is to start anew and make an accurate assessment of spending pressures and taxation. The previous government was operating on an unrealistic basis. This budget presents an opportunity to bring transparency to public finances."

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