The budget will be full of extra borrowing as the government tries to find ways to boost GDP through bigger spending programmes and additional public sector investment. John Healey inherited plans from Rachel Reeves to spend £145 bn more and borrow £97 bn more in 2027-8 than the outgoing Conservative plans for that year set out in the 2024 forecast. This big increase was only possible thanks to Reeves relaxing the fiscal rules and saying there would be better control on spending in the final fifth year of the forecast. She made the Fiscal rules her flexible friend, to help disguise her spending binge.
Mr Burnham does not think that enough. There is the unfunded increase in defence they are pledged to deliver. There are the growing claims of the nationalised industries, the soaring benefits bill and the surge in public sector wages. As tax has already been pushed up by £66 bn from the Reeves tax raids, and as some taxes now yield less as the rates go up, this government will likely go in for concealed extra borrowing. There might be a tax raid on the banks as well, just when they need them to lend more to power growth.
The government is likely to rummage through the worst of the Gordon Brown funny money playbook of Private/public financings. Take Sizewell, a new nuclear project. The government owns 44% of it so it says it does not have to put it on its balance sheet as it is just below 50%. However the Treasury will borrow over £36 bn to build it. It will pass that money to the National Wealth Fund who will lend it for interest to Sizewell, secured against putting an extra charge into everyone’s electricity bill.
Under the Reeves relaxation if the government borrows to spend on a new asset it can net the value of the asset off the borrowing when calculating state debt for the fiscal rules. So if you take out a mortgage you could say I do not have any debt because the house is worth more than the borrowings. Yet you do have a real debt and need to pay the interest on it. You could pay off the debt by selling the house but then you would be homeless, facing big rent bills.
The government’s biggest investment spend is on HS2, now likely to cost around £100 bn. As this government has pledged a nationalised railway it should not deduct a value of the track from the borrowings. Were government policy to change and sale became a possible option, what value would you put on it? It is likely to be a heavily loss making line after allowing for the interest charges on the debt. A new owner would probably want the debt written off, so its value would be small at best and negative if the buyer had to take debt.
The government thinks the state financing bodies, National Wealth Fund, British Business Bank and Great British Energy are ways of increasing spend from more borrowing without counting as state debt. This will need careful analysis as the likelihood is the risk remains with the state so the extra debt should count as a state liability.
They are also looking at a way of getting borrowing into defence to up defence spend without it counting as state debt. If it is expansion of private sector defence contractors with proper risk transfer to them then that could work, but not if the risk and effective debt obligation remains with the taxpayer.
Next year Sizewell will probably need over £6 bn and HS 2 £3 bn, around £10 bn for the pair. British Steel will need £500m for losses without any money for the replacement electric arc furnace they are discussing. Council houses are a lot dearer in public spending terms than Housing Association, where the private money is not regarded as state debt.
The budget will be a wonder of creative accounting, delayed decisions and unfunded liabilities.
October 26, 2026
‘ The budget will be a wonder of creative accounting, delayed decisions and unfunded liabilities.“
The reaction to this will be interesting. Denis Healey gave us the IMF crisis in 1976. In those days we still used to manufacture a lot. Nowadays we rely on the service industry.