The City will see through John Healey’s borrowing gimmick

John Healey told us last month there was nothing progressive about the Government spending £1 in every £10 on debt interest. He went further at the Labour Party conference, calling today’s debt levels an “affront” to his party’s values. Yet in Wednesday’s Budget , he will announce plans that will increase both. How does he justify such hypocrisy? Mainly through accounting trickery and a loophole in the Government’s fiscal rules. Rachel Reeves changed the measure of debt her fiscal rule targets to one based on “public sector net financial liabilities”.

This measure subtracts the value of loans and equity stakes from the state’s liabilities. If the Government borrows to make a loan or buy a stake in a business, the financial asset it acquires initially offsets the new liability under this measure. But the Government still has to raise the cash for this lending by issuing more government debt. The Debt Management Office must sell gilts to fund it. And the interest payable on these gilts is real, even if the investment looks neutral against the fiscal rule.

So when the Chancellor announces he is giving the National Wealth Fund and British Business Bank another £20.4bn of investment capacity over the next five years. This can indeed be accommodated within the fiscal rules. But it is equally true that he will increase government borrowing to fund it. The Office for Budget Responsibility has warned about this sort of trickery. They said this rule could mean politicians would be “incentivised to use financing mechanisms such as loans and equity to meet a given policy objective, even if this is not the best value for money mechanism”.

This is what has happened. Determined to avoid headline tax increases yet still wanting to do what all Labour chancellors do: increase public spending, borrow more and hope no one notices. For someone who has preached fiscal discipline, it’s extraordinary that he thinks he can get away with this. While £20bn across five years may not be much in the grand scheme, if the full £20.4bn were eventually financed at around 5pc, the gross annual financing cost would be roughly £1bn.

How does that sit with Healey’s values? Or is he happy to cast those aside, as he does with his views on defence spending ? The Chancellor and his allies will no doubt argue that the investments will generate a return. That, even after accounting for financing costs, the Treasury will be net better off. Maybe. But the National Wealth Fund reported a £67.5m pre-tax loss in 2025-26. That was an improvement on the £152.2m loss it recorded the year before.

But if you exclude income from the Sizewell C transaction, the latest loss was £144.4m. This does not mean this additional financing won’t generate a return, but the track record doesn’t guarantee it. In years to come, the increasing use of these public financial institutions, also known as PuFins, to hide the debt impact of spending will come to resemble the Private Finance Initiative scandals of the last Labour government. The Chancellor is using a financing structure to make today’s decisions appear painless and leave future governments to manage the consequences.

It is as shameless as it is reckless. Worse still, this isn’t the only borrowing increase the Chancellor is poised to announce. He is also creating a £1.5bn lending facility for regional mayors, offering cheaper loans to councils that want to build. There is no question that this Government’s answer is more borrowing and more debt. Healey says fiscal discipline underwrites every promise his Government makes. Yet when faced with demands for extra spending, his instinct is to borrow more rather than find room within the money the Government already spends.

The idea that he couldn’t find £4bn to £5bn a year in genuine savings to fund this sort of investment is ridiculous. The £20bn will not hit the gilt market on Wednesday. But it will hit it at some point. Deutsche Bank estimates that the Budget will add almost £10bn a year to the Government’s cash borrowing later this decade, taking its gross financing requirement above £250bn by 2030-31. More importantly, investors are entitled to ask what happens the next time Healey faces a difficult spending choice and the time after that.

A fiscal rule cannot convince them that borrowing is controlled if every new priority creates another lending facility while decisions on spending and welfare are put off indefinitely. They will price the Government’s appetite for debt, not just its compliance with a target. That’s how you earn a moron premium. Liz Truss earned hers in a single afternoon. Healey seems content to earn his moron premium one lending facility at a time.