Investors ‘may be less than impressed’ by John Healey’s £9bn borrowing plans
Investors may be “less than impressed” by John Healey’s plans to increase borrowing by £9bn a year to take stakes in assets such as infrastructure, analysts have warned.
On Tuesday evening, it was reported that the new Chancellor and Treasury ministers were working on a proposal to deploy billions in the direction of infrastructure, housing and business by using borrowed funds.
The extra funds would be handed to mayors to boost investment in local areas, according to The Times. Technically, this spending could fit within the Starmer-era fiscal rules, as investments in assets can offset costs on the balance sheet.
Investors in the UK have suggested new reports, which provide some insight into the “flexibility” in the fiscal rules hinted at by Burnham and Healey, are not likely to have an immediate impact on market pricing.
Is there really flex in Labour’s fiscal rules?
Another £9bn in borrowing each year was also “small fry in the grand scheme of things”, according to Quilter’s head of fixed interest Richard Carter.
But Carter warned that there may be more “cost-effective ways” to consider innovative alternatives to funding government ambitions on growth, such as encouraging retail investors to buy gilts – the bonds which determine the cost of government borrowing.
He added that it is “understandable” that the government is looking carefully at the precise terms of the current fiscal rules, given that the government’s room for manoeuvre has been limited by Labour manifesto promises not to raise income tax, VAT or national insurance.
The investor added: “Borrowing dressed up in new clothes is still borrowing at the end of the day, and the UK’s precarious fiscal position is still somewhat at the mercy of the bond markets.
“As such, gilt yields are likely to continue to tread higher, and the debt servicing level will remain substantial.”
He said although markets may “shrug” at the possibility of more borrowing, there was an “indication that spending remains the government’s preferred antidote to the growth malaise and it is that fact that markets may be less than impressed with”.
Healey needs to ‘prove’ worth of borrowing plan
Debt interest payments are projected to total more than £110bn, though borrowing costs could rise higher on the back of elevated gilt yields if the conflict in the Middle East produces an inflationary squeeze.
Oliver Faizallah, head of fixed income for Raymond James, said there would be “a little bit of nervousness” in the weeks leading up to the Budget as speculation around spending, borrowing and taxes ramp up. He predicted that bond investors could demand higher interest payments on long-term bonds as worries over the new government’s fiscal stance bubble up.
He said the government will still need to properly communicate and “prove” that investments generate returns.
“My first reaction isn’t ‘Okay, this is the first step towards fiscal irresponsibility’,” Faizallah told City PM.
“In order to satisfy the rules for the liability to be offset with an asset, it needs to be sort of proven that that asset is going to be additive to the UK. Then it just comes down to communication, really.”