UK Treasury officials are concerned that Prime Minister Andy Burnham’s plans to use flexibility within Britain’s fiscal rules to increase investment could unsettle financial markets and push government borrowing costs higher. Burnham said after becoming prime minister on July 20 that his government would retain the existing fiscal framework but use any flexibility available within it, an approach that could permit substantially higher borrowing for priorities including housing, transport and defence. Officials fear investors may view the arrangement as lacking a binding constraint, despite the government formally remaining within its fiscal rules. Britain already has the highest government borrowing costs among Group of Seven economies, with public debt close to 100% of gross domestic product and the government spending around £110 billion annually to service £2.9 trillion of debt. Chancellor John Healey has used the term scope rather than flexibility and indicated that faster investment may also require welfare cuts and changes to departmental budgets, while officials are considering possible safeguards to reassure investors, including new limits within the existing framework.
Fiscal flexibility may raise borrowing, pushing yields up.
