Budget 2024 live: Rachel Reeves will face budget questions after £40bn tax rise

Dharshini David
Chief economic correspondent

Image source, Getty Images

The government typically spends more than its revenue, and the difference is financed by borrowing from financial markets through bonds. The interest rate on these bonds, or bond yields, is influenced by perceptions of the government’s creditworthiness and the riskiness of its plans.

The big windfall in Liz Truss’ government’s 2022 mini-budget saw these rates soar, reflecting concerns about the size of the tax cuts and what that meant for the amount the government had to borrow, as well as a lack of oversight from an official, independent forecasting body . This resulted in a temporary increase in the associated costs of new fixed-rate mortgage loans.

Most governments set their own rules, trying to keep these rates low by demonstrating accountability.

Rachel Reeves will confirm two new rules. Like Jeremy Hunt, he wants to see public debt growing over time relative to income falling in five years’ time. But by changing the definition of debt, it intends to borrow billions more. However, he hopes that this will not result in a sharp increase in loan costs due to the unused entire lending space offered. Crucially, such loans are intended only for investment projects, such as roads, intended to stimulate economic growth.

Its second principle will be that in five years, everyday public services will have to be financed by revenues such as taxes.

For the chancellor, credibility comes at a price.