Key facts
- Chancellor John Healey is under pressure to boost public investment and borrowing.
- Economists suggest public financial institutions could borrow an additional £9 billion annually within existing fiscal rules.
- Proposals include allowing public corporations to borrow directly from markets for infrastructure and housing.
- This approach could offer greater investment scope but may come with higher interest rates.
- The Treasury has previously resisted allowing public corporations to issue debt independently.
New Chancellor John Healey is facing calls to be bold on public borrowing to fund infrastructure and housing investments, a key pledge of Prime Minister Andy Burnham's growth agenda. With his first budget approaching, Healey must balance immediate spending needs, such as a VAT cut on energy and a defense funding gap, with the long-term investment goals.
Economists and thinktanks suggest there is flexibility within the UK's fiscal rules, particularly concerning public sector net financial liabilities (PSNFL), to allow for increased borrowing. The Resolution Foundation has proposed that public financial institutions could borrow up to an additional £9 billion annually without breaching these rules. Lord Jim O’Neill has also indicated scope for more borrowing for infrastructure projects.
However, some experts, like Helen Miller of the Institute for Fiscal Studies, caution against becoming too fixated on the fiscal rules, emphasizing the need for a strong substantive case for the investments themselves. Thomas Aubrey from Cambridge University argues that the current PSNFL framework may be insufficient and advocates for public corporations to borrow directly from markets, similar to models in other major economies. This would allow for greater investment in areas like energy, water, infrastructure, and housing, potentially attracting capital from sources like pension funds without directly impacting government bond markets.
Treasury officials are likely to be wary of any measures that could unsettle gilt markets, given the UK's already higher borrowing costs. Historically, the Treasury has blocked proposals to allow public corporations to borrow independently. This issue is a significant early test for the new administration's willingness to adopt more radical approaches to economic policy.