Dharshini David
chief economic correspondent

image source, Getty Images

The government often spends more than it receives in revenue, the difference being financed by borrowing from financial markets through bonds. Their interest rate, or bond yield, is influenced by perceptions of the government’s creditworthiness and the riskiness of its plans.

The big cut in the Liz Truss government’s 2022 mini-budget has seen those rates rise, reflecting concerns about the size of tax cuts and what this means for the amount the government has to borrow, as well as a lack of oversight from the official independent body. predictive organ. This triggered a temporary increase in the relative cost of new fixed-rate mortgages.

Most governments impose rules on themselves to try to keep these rates low by showing responsibility.

Rachel Reeves will approve two new rules. Like Jeremy Hunt, he wants public debt built up over time to fall relative to income within five years. However, it plans to borrow billions of dollars more by changing the definition of debt. But it hopes this will not lead to an increase in borrowing costs by not using all of the borrowing space on offer. And importantly, such borrowings only apply to investment projects aimed at boosting growth, such as roads.

Because the second rule is that within five years, daily public services will have to be financed by revenues such as taxes.

For a chancellor, credibility has a price tag.