Fiscal rule change puts economy at risk of ‘collapse’, city analyst warns

Monday, October 28, 2024, 6:00 am
| Updated:

Sunday, October 27, 2024, 4:01 pm

Fiscal rule change puts economy at risk of ‘collapse’, city analyst warns — Treasury Secretary Rachel Reeves. Stefan Rousseau/PA Wire

The UK economy is at risk of collapse as a result of the Chancellor’s likely changes to fiscal rulesAccording to the city’s consulting firm.

Rachel Reeves confirmed last week that she would reform budget rules to free up tens of billions in extra investment spending as parliament proceeds.

However, a number of City commentators have sounded the alarm about the changes and their potential impact on the economy.

“Changing the definition of borrowing could be a big, albeit temporary, win,” Nick Winters, a partner at a tax and advisory firm. Blick Rothenburg said.

“This proposal makes it look like Labor is setting up a big spreadsheet to try and deliver on all its promises. But unlike a spreadsheet, our economy can only make so many changes before it collapses,” he added.

Winters noted that government bond yields – the interest rate on government debt – have risen significantly in recent weeks, while yields on other government bonds have fallen.

At the end of last week, the 10-year Gilt yield was at its highest level in 16 weeks, while the spread to the German Bund was at its highest level in more than a year.

Winters suggested this was because markets were “scared” by rumors of a fiscal rule change. Under the new fiscal rules, the government will aim to achieve a reduction in public sector net financial liabilities (PSNFL) over five years, rather than in public sector net debt.

The PSNFL is different because it includes the value of government-owned financial assets, such as student loans and private business interests held by public investment entities.

According to official forecasts in March, the change would give Reeves the ability to borrow an extra £50 billion a year by the end of the decade, although the government is unlikely to take advantage of all that extra fiscal space in one go.

In an interview with the Obozrevatel newspaperReeves said more investment was needed to prevent an economic “downturn.”

“We inherited a plan from the previous government that public sector net investment, capital investment, would fall sharply over the course of this parliament,” she said.

“This will mean that dozens of hospitals will not be built. This will mean that huge opportunities to grow our economy in the digital and energy sectors will be missed and those jobs will go elsewhere.”

But Andrew Griffith, a former city minister, accused the chancellor of “breaking promises like a runaway horse running into the Grand National.”

In its manifesto, Labor committed to achieving a reduction in the share of debt in the economy by the fifth year of the forecast, although it did not specify what measure of debt it would use.

“Today’s debt game means the next generation will pay for it,” Griffith argues.

Allan Monks, an economist at JP Morgan, warned the changes could allow “almost limitless spending” through institutions such as the National Wealth Fund.

This is because lending through off-balance sheet mechanisms will create illiquid financial assets that can be offset against additional borrowings taken out to finance the lending in the first place.

“This raises the prospect of a return to the PFI-type world of the early 2000s, where government borrowing is ramped up to on-lend funds to off-balance sheet entities, which then lend (or) invest in government projects,” Barclays analysts said.