August 6 2026 - 10:00am
There is something inevitable about the news that the Government is considering borrowing up to £9 billion in the next Budget to boost growth. Andy Burnham has enjoyed a bounce in the polls, but it seems unlikely that the new Prime Minister will spend that freshly-won political capital on unpopular tax increases. Chancellor John Healey has already asked for departments to prepare for cuts but, as Keir Starmer found out, this is a very quick way of making enemies in the Cabinet. Borrowing is the obvious route to maintain unity within the Labour Party.
The first thing to note is that borrowing £9 billion per year until 2031 is not likely to trigger a crisis in the bond markets. This would only amount to adding 1.5% to the total stock of British Government debt over the next five years. Based on the current cost of a 10-year gilt, this sort of measure is going to cost the country a couple of billion in additional interest payments by 2031 — or 0.16% of current Government expenditure. Markets do not worry about these sorts of rounding errors. What’s more, Britain has its own independent currency, and is not going to default on its debt. The problem is not how much Burnham will be borrowing, but the idea that throwing another £9 billion into a failing economic model is going to work.
At its core, the idea behind this borrowing plan, previously outlined by Burnham’s unofficial economic advisor Jim O’Neill, is to use the money to invest in areas which boost the country’s productivity, such as housing, transport infrastructure and business investment. This should increase output and prevent markets worrying about inflation. The British Business Bank (BBB) — a Government scheme to help businesses access financial support — only last year experienced a £10 billion increase in its lending capacity, but is apparently in line to receive some of this £9 billion of additional investment.
Here is where the plan starts to break down. The British Business Bank has operated since 2014, but its balance sheet is still only worth £6 billion; its German equivalent, KfW, has assets over €545 billion. To counter this, the Government has deployed the classic British strategy of spreading a small amount of jam over a very large slice of toast.
The BBB can only take stakes worth £65 million per business, and the rules make it difficult to provide the large volumes of capital that future global giants need. Palantir, for example, has raised over $2.4 billion from more than 19 funding rounds since its inception in 2003 to become a global tech player. The exodus of UK firms to the US is a sign that founders and investors do not think the country can raise that kind of financing. This is why Britain is falling behind global competitors.
State-backed financial institutions need to go further in Britain. This will require significant further investment, not just measly sums here or there. The same can be said about everything from housing to transport: £9 billion won’t even fill all the potholes that have emerged on English roads. For investment to work, the country needs a clear plan for what will be manufactured and sold over the years ahead to generate growth and investment. Otherwise, it is just throwing another £9 billion down the drain. The biggest problem with this latest tinkering with the fiscal rules is not that it is more borrowing, but that it risks a continuation of the same approach which got Britain into its current mess.
Andrew O’Brien is the former Director of Policy at the think tank Demos and currently Head of Secretariat of the Independent Commission on Neighbourhoods. He writes in a personal capacity.
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