UK fiscal rules face fresh scrutiny as borrowing rises

The news

UK government borrowing rose sharply in May to £23.3bn, £5.4bn more than the same month last year and £5.6bn above the Office for Budget Responsibility forecast. Borrowing for the financial year to date reached £46.3bn, leaving the UK £7.7bn above the OBR forecast after just two months. Public sector net debt now stands at 95.1 per cent of GDP. Andy Burnham has pledged to follow Rachel Reeves’ rules on day-to-day spending and debt falling as a share of GDP, while also floating the idea of loosening those constraints.

What's at stake

The UK’s fiscal rules were first introduced by Tony Blair’s Labour government in 1997 and have now been altered ten times, according to the Institute for Government. Reeves changed the rules at her first budget in October 2024, redefining the debt measure to increase room for investment and allowing as much as £70 billion of additional borrowing over five years. The current framework requires day-to-day spending to be covered by tax receipts and debt to fall as a share of GDP. Burnham has indicated he would follow these rules if he became prime minister, but has also discussed taking greater control of essential public services, including potential nationalisation of Thames Water.

The rules shape how much the government can borrow for long-term projects versus day-to-day costs. Recent borrowing figures have increased pressure on the government to stay within its targets. The debate centres on whether the constraints limit necessary investment or provide essential market credibility.

The case for

Looser rules would let the government fund vital long-term investment. Andy Haldane has argued the case for changing the rules is overwhelming because they should allow for more government investment to drive growth. Jim O’Neill has called the UK’s fiscal constraints petty and arbitrary and said the government should be bolder about borrowing to invest. Louise Haigh has written that the current framework pushes governments to make short-term decisions to hit arbitrary future targets and creates a misleading sense of precision.

The case against

Relaxing the rules risks higher borrowing costs and market instability. Rachel Reeves has spent recent months arguing that fiscal stability is essential as Britain confronts rising costs and public debt. Some bond traders and international investors have shown confidence in her approach. The latest borrowing figures have already pushed public sector net debt to 95.1 per cent of GDP, a level last seen in the early 1960s, and further increases could add pressure on gilt markets.

Why it matters now

If the rules are loosened, the government could borrow more for infrastructure and public services in the near term. If they remain unchanged, ministers will face continued pressure to meet the existing targets on debt and day-to-day spending. The next political milestone is a potential special election that could determine whether Reeves continues in her role.

Further reading

Bloomberg · retailgazette.co.uk

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