Rachel Reeves must “get the balance right” when announcing changes to Britain’s debt rules in next week’s budget given the potential knock-on effects to borrowing and mortgage rates, the boss of NatWest has said.
The bank’s chief executive, Paul Thwaite, said markets would be sensitive to the chancellor’s reasons for releasing up to £50bn of borrowing headroom after she confirmed in Washington on Thursday that she planned to rewrite her fiscal rules.
Thwaite said it was not a surprise that the new Labour government was looking to change the way public debt was measured in order to boost its spending power, noting that the UK had “many different fiscal frameworks in recent years”.
However, he added that the way in which financial markets reacted to those changes, and the subsequent knock-on effects to borrowing and mortgage rates, would depend on what the government planned to spend that money on.
“The market will take into account, really, what’s trying to be achieved by any change,” Thwaite said after the bank reported its third-quarter results on Friday. “So [they will focus on] what does that mean for spending, what does it mean for investments, what does it mean for tax, rather than the specific rules per se.”
The warning comes two years after the disastrous mini-budget of the then prime minister, Liz Truss, in which announcements over unfunded tax cuts for the wealthy triggered a market meltdown and a surge in borrowing costs that hit homeowners across the country.
“We need to see what the changes are before we can make a judgment,” Thwaite said on Friday. “But obviously the intention and the objective there should be to get the balance right, so that there’s confidence in the public finances, but also the ability to invest is created.”
After weeks of speculation, Reeves told the International Monetary Fund in Washington on Thursday that rules limiting her spending power would be overhauled as part of her maiden budget next Wednesday.
It will mean revising how the Treasury calculates shortfalls in the government budget over the rest of the parliament to release up to £50bn to invest in public infrastructure.
Reeves, who made the announcement at the IMF’s annual meeting in Washington, stressed that she was not planning to use all the headroom at once, nor to change the rules to fund the government’s basic operations.
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“It’s really important for the sustainability of public finances that we give confidence to markets that we’re not borrowing to pay for the day-to-day functioning of government,” she said. “And we’ll work with the National Audit Office and the Office for Budget Responsibility to make sure that all those investments are properly validated.”
NatWest’s third-quarter results showed pre-tax profits rising 26% to £1.7bn thanks to stronger bank deposits and lending in the three months to September. It allowed the bank, which is still 16% government-owned after its state bailout in 2008, to raise its full-year income forecasts from £14bn to £14.4bn for 2024.
The news pushed NatWest shares up more than 5% on Friday morning to their highest level since 2011.