Thursday, January 2, 2025
Finance

Chancellor warned on potential £50 billion spend

finances decline

The government is considering changing its fiscal rules to give it more room to borrow, which could open up £50 billion of extra spending

Chancellor Rachel Reeves’s plan to increase borrowing in the budget risks pushing up interest rates, according to analysis from the Treasury.

The research paper, published in December, suggests rewriting the UK’s fiscal rules could raise the cost of debt. Shadow chancellor Jeremy Hunt claims it could lead to “mortgage misery” for people across Britain.

The government is considering changing its fiscal rules to give it more room to borrow, which could open up £50 billion of extra spending.

But the Treasury paper warns a “fiscal loosening” of just 1% of GDP could lead to a “peak rise in interest rates” of as much as 1.25%.

The document cautions every rise in yearly borrowing of £25 billion could cause interest rates to soar by between 0.5% and 1.25%.

The Institute for Fiscal Studies (IFS) echoed this, warning borrowing an extra £50 billion in 2028-2029 could have a “material impact on interest rates”.

Mortgage rates are now beginning to decline, after increasing dramatically following Liz Truss’s mini-budget.

With central interest rates currently staying at 5%, an increase to 6.25 would add nearly £200 per month to an average mortgage.

The government has repeatedly warned “tough decisions” will have to be taken at the 30 October budget as a result of what they claimed was a £22 billion “black hole” left by the previous government.

Speaking to The Telegraph, Hunt warned: The consistent advice I received from Treasury officials was always that increasing borrowing meant interest rates would be higher for longer – and punish families with mortgages.

That would be a hammer blow and lead to mortgage misery for many people just at the moment the BoE is expected to bring interest rates back down, he said.

He demanded the Office for Budget Responsibility (OBR) be legally obliged to publish a full analysis of any changes to the UK’s fiscal rules.

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