October 9, 2024 11:06 am

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Nikka Sulton

The government is currently considering revising its fiscal rules to create more flexibility in borrowing, potentially unlocking £50 billion for additional spending. This proposal, part of Chancellor Rachel Reeves’s budget plan, aims to provide the government with more room to manoeuvre financially. However, there are growing concerns that such a move could have unintended consequences for interest rates and the broader economy. 

An analysis from the Treasury highlights that increasing government borrowing could lead to a rise in borrowing costs, which might push interest rates higher. This is especially concerning in the current economic climate, where any increase in rates could have a significant impact on mortgage holders. As a result, there is speculation that this change could drive up the cost of servicing national debt and place further pressure on homeowners. According to a research paper published in December, rewriting the UK’s fiscal rules could increase the overall cost of debt, making it more expensive for both the government and private borrowers.

Shadow Chancellor Jeremy Hunt has been vocal in his criticism of the potential policy change, warning that it could result in “mortgage misery” for millions of people across Britain. Hunt argues that higher borrowing costs could lead to increased mortgage rates, at a time when many households are already struggling with the cost of living. The fear is that any rise in interest rates will have a knock-on effect on mortgage payments, potentially pushing many families into financial hardship. 

While the government is weighing the benefits of unlocking more spending power, the potential risks of increased borrowing are clear. The balance between stimulating the economy and maintaining fiscal responsibility will be key as ministers decide whether to push forward with these fiscal rule changes. Both political and economic impacts are being closely scrutinised as the debate continues, with the future of mortgage rates and public spending hanging in the balance.

The Treasury’s report highlights a growing concern over the potential impact of increased government borrowing on interest rates. It warns that even a relatively small fiscal expansion, equal to one percent of GDP, could trigger a rise in interest rates by up to 1.25 percent. This “fiscal loosening” would not only affect government borrowing costs but could also have far-reaching effects on mortgage holders and the broader economy.

According to the document, an additional £25 billion in annual borrowing could push interest rates up by 0.5 to 1.25 percent. Such a rise would likely lead to higher mortgage repayments for homeowners and increased debt servicing costs for the government. These figures illustrate the delicate balance the government must strike when considering increased spending, as it risks making borrowing more expensive for both the public and private sectors.

The Institute for Fiscal Studies (IFS) has echoed these concerns, suggesting that borrowing an extra £50 billion by 2028-2029 could significantly affect interest rates. They warn that such an increase in borrowing could have a “material impact” on the cost of borrowing across the UK. If interest rates were to rise as a result, this could dampen economic growth and put additional pressure on households already struggling with high living costs and rising mortgage payments. The government’s fiscal decisions, therefore, carry the potential for widespread economic consequences, making careful consideration vital.

Mortgage rates are finally beginning to fall after the steep rise triggered by the aftermath of Liz Truss’s mini-budget, which caused disruption in the financial markets. The chaos that followed pushed mortgage rates to unprecedented levels, leaving many homeowners facing higher monthly payments. However, with the situation now more stable, rates are starting to ease, providing some relief to those with existing mortgages and those looking to enter the property market.

At present, the Bank of England’s central interest rate stands at 5%, but any further increase to 6.25% could significantly impact borrowers. Experts have calculated that such a rise would add an additional £200 per month to the average mortgage payment, further squeezing household budgets. This comes at a time when many people are already struggling with the cost of living crisis, making housing affordability a major concern for both current and prospective homeowners.

The government has acknowledged that it faces difficult financial decisions in the forthcoming 30 October budget, citing what they describe as a £22 billion “black hole” left by previous economic policies. Chancellor Jeremy Hunt has warned that any increase in borrowing could prolong the period of higher interest rates, which would ultimately harm households. In a statement to *The Telegraph*, Hunt stressed that such a scenario could be devastating for mortgage holders, potentially leading to what he calls “mortgage misery” for families, just as the Bank of England is expected to begin lowering rates in an effort to stabilise the economy.

 

He has urged that the Office for Budget Responsibility be legally required to release a full, detailed analysis of any modifications to the UK’s fiscal rules. This proposal aims to increase transparency and allow for a thorough evaluation of how such changes could affect borrowing, public spending, and overall economic stability. Requiring this analysis would offer both the government and the public a clearer picture of potential risks and benefits, helping to inform more responsible decision-making.

During a recent interview with Sky News, Peter Kyle, the Secretary of State for Science and Technology, discussed the government’s financial situation, emphasizing that “there is money to spend,” but it must be invested wisely. He explained that the current administration faces the dual challenge of fixing the damage inherited from the previous government while also finding ways to stimulate economic growth. This balancing act, according to Kyle, is crucial in managing the country’s finances responsibly. By doing so, the government can mitigate some of the negative effects of the past while laying the groundwork for a more prosperous future.

Kyle also pointed out the government’s focus on future technologies, viewing them as key to unlocking long-term economic growth. Investments in cutting-edge sectors not only promise to drive innovation but can also attract substantial private sector investment. He believes that by carefully selecting where public funds are directed, the government can create a multiplier effect, where public investments spur additional contributions from private enterprises. This strategy, Kyle argues, could position the UK as a leader in emerging industries, helping to revitalize the economy and secure sustainable growth in the coming years.

 

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