You can’t trick the markets with extra borrowing, experts and former chancellor warn Burnham

Andy Burnham has been warned by financial experts and a former chancellor that the bond markets will see through his possible plans for £9bn of extra borrowing, likening the proposal to "a credit card paid for by the taxpayers of tomorrow”.

The Treasury is reportedly drawing up plans to boost growth by increasing borrowing – something which would be made possible by former chancellor Rachel Reeves’ fiscal rules if the money is spent on infrastructure, housing and support for businesses.

The move, first reported by The Times, could free up more than £9bn per year for extra spending by 2031, with supporters of the plan arguing that it would allow higher public investment without unsettling the debt markets.

But former Conservative chancellor Phillip Hammond told The Independent that the bond markets “will see straight through this ruse and price UK debt up accordingly”.

"The bond markets are on red alert for any UK backsliding on fiscal discipline and I fear they will see straight through this ruse and price UK debt up accordingly.

"There are no free lunches: trying to create a few extra billions of headroom will increase the already market-leading cost of Britain’s debt”, he said.

Meanwhile, James Hodgkinson, research associate at the free market think tank the Adam Smith Institute argued: "The promise that borrowing will pay for itself is the oldest line in the Treasury songbook, and the gilt market stopped humming along years ago.

"If ministers really want mayors to drive growth, they need the power to deregulate and build, not a credit card paid for by the taxpayers of tomorrow.”

The Institute for Fiscal Studies (IFS), the UK’s leading economic think tank, also raised concerns, questioning whether the “benefits of any extra borrowing” are “sufficient to outweigh the costs”.

The prime minister is facing a swathe of difficult financial decisions at the next budget, with Mr Burnham widely expected to put up taxes and attempt to make cuts to the welfare bill.

He is also under pressure to boost Britain’s sluggish economic growth, which has taken a hit as a result of the Iran war, and ease mounting cost of living pressures.

"Borrowing is currently very expensive; it is already the case that £1 in every £12 the government spends is on debt interest. We should expect significantly higher borrowing to come with higher costs”, the IFS said.

"National debt is high and rising and if it cannot be contained the UK will be more vulnerable to future shocks.

"If the government thinks they have found investments that can boost economic growth, there is still a question over whether these should be funded by borrowing or paid for today though cuts to other government spending or tax rises.”

Economist and former Treasury adviser Jonathan Portes said Ms Reeves’ fiscal rules are “clearly an improvement”, adding that “additional public investment in productive assets is very welcome”.

But he argued that £9bn a year, amounting to just 0.3 per cent of GDP, will “not be transformative”, warning that it would “not avoid the need for hard choices in particular growth-enhancing tax reform – in the Budget”.

It comes just days after chancellor John Healey told the Cabinet they must make be prepared to make cuts to finance new spending promises, including a swathe of new policy measures announced by Mr Burnham in his first few days in office.

Within days of taking office, Mr Burnham announced a 20 per cent business rate cut for pubs, clubs and live music venues, a VAT cut to electricity bills and capped bus fares to £2 from January.

The business rate cuts alone are expected to cost the government around £100m per year – but it is unclear how it will be funded.

Mr Burnham is also facing at least a £4.7bn black hole to fill in Sir Keir Starmer’s defence spending plan. But announcing his first budget will take place October 28, Mr Healey vowed it would be “built on fiscal discipline”.

Responding to reports of plans to increase borrowing, Lord Daniel Hannan, director of the Institute for Economic Affairs and former Tory peer, said: “You’d think from reports of what is planned that borrowing was currently low.

"In fact, we are already borrowing nearly £150 billion a year, and using two thirds of it to service the interest on past debts. If you really could borrow your way to growth, we’d have found a way to do it by now.”

The Treasury has been contacted for comment.