LONDON, Oct 5 (Reuters) - British finance minister Rachel Reeves announced plans to introduce "guardrails" to ensure that increased borrowing for investment in her upcoming budget remains prudent. This move aims to reassure investors amid concerns about rising public debt.
Reeves is set to deliver her first tax-and-spending budget statement on Oct. 30, marking a significant moment for Prime Minister Keir Starmer's new Labour government, which has committed to enhancing investment in infrastructure and transitioning to a net-zero economy to stimulate economic growth.
With public debt currently around 100% of the UK's annual economic output, investors are closely monitoring the extent of additional borrowing and potential tax increases. Recently, British gilt yields have risen more sharply than those of other government bonds, reflecting worries over the scale of new debt sales. Concurrently, warnings of a challenging budget have negatively impacted consumer confidence, overshadowing the early days of the new government.
Reeves and Starmer are particularly cautious, recalling the turmoil in Britain's bond market caused by former Prime Minister Liz Truss's unfunded tax cut plans, which ultimately led to her resignation.
In her interview with the Financial Times, Reeves emphasized that the Office for Budget Responsibility (OBR) and the National Audit Office (NAO) will closely evaluate her public investment plans, which are intended to encourage private investment as well.
She expressed hope that the long-term benefits of higher public investment would be recognized, despite the OBR's usual five-year forecasting period. Additionally, Reeves confirmed plans to revise the government's fiscal debt rule to consider the advantages of investments alongside their costs, although she did not specify the amount of extra spending this might entail.
She also highlighted the necessity of increasing taxes to prevent cuts to already strained public finances, which were implied by the previous Conservative government's plans. "There won't be a return to austerity," Reeves stated, adding that the upcoming budget aims to provide a transparent assessment of spending pressures and taxation. "The previous government was relying on a fiction. The budget is an opportunity to bring honesty to the public finances," she concluded.