The government is considering a change to borrowing rules that could potentially lead to market instability and a financial crisis similar to Liz Truss’s mini-Budget meltdown. Financial experts have warned that the proposed plans to unlock £50bn of extra spending could trigger a negative response from investors. Nigel Green, the CEO of deVere group, highlighted the surge in UK gilt yields as a sign of growing concerns about prioritizing short-term fiscal stimulus over long-term sustainability.
Paul Johnson from the Institute for Fiscal Studies also cautioned against borrowing billions of pounds for new infrastructure, stating that it is a challenging and uncertain task. He emphasized that the government’s ability to borrow is determined by market interest rates, not arbitrary borrowing targets. Despite these warnings, the government spokesperson has reassured the public that economic stability will be maintained, and fiscal rules will be upheld.
There are concerns that the proposed changes could lead to increased debt costs, as indicated by a Treasury research paper suggesting that even a small fiscal loosening could cause a significant rise in interest rates. The paper warned that every £25bn increase in borrowing could lead to a surge in interest rates by 0.5 to 1.25 per cent. Despite these risks, the chancellor is reportedly moving forward with the plans.
It is essential for the government to proceed with caution and consider the potential consequences of significant borrowing. Market uncertainty and investor backlash could have far-reaching implications for the economy. By prioritizing long-term sustainability and economic stability, the government can mitigate the risks associated with excessive borrowing and ensure a stable financial environment for future generations.
