Healey Urged to Be Bold on Borrowing in First Test of Burnham’s Growth Pledge

The UK budget is less than 12 weeks away, and Chancellor John Healey faces a daunting task in balancing public investment with fiscal prudence. The Treasury’s rules are clear, but there’s room for maneuver that some economists have been downplaying. As the Starmer government seeks to boost spending on infrastructure and housing, it’s time to reexamine what constitutes borrowing.

A key challenge facing Healey is filling a £5bn funding gap in the defence investment plan left by his predecessor Rachel Reeves. Although this gap has been partially mitigated by “headroom” against the rules, courtesy of Reeves’ spring forecast, its extent is unclear given the ongoing war with Iran. The Treasury appears to be exploring ways to exploit flexibility within existing fiscal rules.

Public sector net financial liabilities (PSNFL) was introduced by Reeves as a way to allow for extra borrowing without counting against the Treasury’s target. Economists have long argued that this flexibility could be stretched further, but it seems unlikely to meet the demands of Burnham’s growth pledge. A recent paper from the Resolution Foundation thinktank suggests that public financial institutions like the National Wealth Fund and British Business Bank could borrow up to an additional £9bn a year without breaching the rules.

However, not everyone agrees with this line of thinking. Helen Miller, director of the Institute for Fiscal Studies, cautions against getting too hung up on fiscal flexibility. Instead, she argues that the question of whether there is scope within the rules to borrow more should take a backseat to questions about the substantive case for investment. “What’s the real issue here?” Miller asks. “Is that investment worth doing?”

Some experts argue that public corporations should be allowed to borrow directly from markets, rather than relying on government guarantees. This approach, championed by Thomas Aubrey of the Bennett school of public policy at Cambridge University, would involve allowing corporations like development companies for infrastructure projects to issue bonds in their own right.

Allowing public corporations to tap into a deep market for public corporation debt could provide significantly more scope for long-term investment and allow public bodies to borrow at lower costs. The UK is one of the few major economies that doesn’t currently have such a market, which makes it an attractive proposition for investors looking to match their liabilities with assets.

Aubrey’s proposal has been gaining traction in Whitehall circles, with other departments expressing interest in exploring this option further. However, it would require agreement from the Treasury, and there are concerns that opening up public corporations to direct borrowing could unsettle the gilt markets. The UK’s borrowing costs are already higher than many of its peers’, making caution a necessary virtue.

As we look to boost investment in infrastructure and housing, it may be time to challenge this orthodoxy. A more radical approach to public financing is needed if we’re serious about meeting Burnham’s growth pledge. Whether that means allowing public corporations to borrow directly or exploring other creative options, one thing is clear: the Treasury can’t keep sticking its head in the sand.

The next few months will be crucial for Healey and the Starmer administration as they grapple with economic questions central to their plans for devolution and reindustrialisation. It’s a complex web of fiscal rules, investment requirements, and competing priorities that demands creative thinking from policymakers. As we watch this play out, one thing is certain: the UK needs bold leadership on borrowing if it wants to succeed in the years ahead.

Burnham’s growth pledge will be put to its first real test when Healey presents his budget. Will he seize this opportunity and push for a more flexible approach to public financing? Or will we see business as usual from the Treasury? The outcome is far from certain, but one thing is clear: our economic future depends on it.