Reeves’ sniffle makes the bond markets shiver, says PATRICK TOOHER

Rachel Reeves clearly loves her new borrowing rules. ‘These fiscal rules will ensure our public finances are on a firm footing while enabling us to invest prudently alongside business,’ she told the House of Commons.

If the reaction of the bond markets is anything to go by – gilt yields soared – the footing may not be as firm as the Chancellor believes.

And no wonder. As expected, Reeves ditched the old way of measuring the parlous state of the public finances so that she can borrow more to fund a public sector spending spree – and still have debt falling as a percentage of annual economic output, or GDP, within her five-year target.

Bending the rules: The Chancellor has ditched the old way of measuring the parlous state of the public finances so that she can borrow more to fund a spending spree

But no amount of magic wand-waving and crystal-ball gazing can hide the fact the national debt remains on an ‘unsustainable’ course.

Indeed, that is the verdict of the Office for Budget Responsibility (OBR), the independent fiscal watchdog.

Net debt already stands at a thumping £2.8 trillion – equal to GDP – and is at its highest level since the early 1960s.

It will top £3 trillion the coming years, pushed ever higher in no small part by Reeves’s decision to borrow £32.5billion a year more on average than planned by her Tory predecessor Jeremy Hunt.

Even under the Chancellor’s new fiscal rules, national debt will sky-rocket to almost three times the size of the economy over the next 50 years as people live longer, the OBR forecasts. 

It highlighted the double-whammy of an ageing population, which means more spending on public health and state pensions, plus a falling birth rate.

Fewer babies were born in 2023 than in any year since 1977, the Office for National Statistics said this week. Put another way, as the baby-boom generation – born between 1945 and 1964 – retires, less tax will be raised.

And there will be fewer people left in work to make up the revenue shortfall. In short it means that while spending continues to go up, tax revenues stall.

The watchdog identified three key areas of spending growth over the next 50 years:

• Health: set to almost double from 7.6 per cent to 14.5 per cent of GDP;
• State pensions: to rise from 5.2 per cent to 7.9 per cent of GDP;
• Debt interest payments: to quadruple from 2.8 per cent to 11.3 per cent of GDP.

Burden: The national debt already stands at a thumping £2.8trillion – equal to GDP – and is at highest level since the early 1960s

Short of a productivity miracle, mass migration or slashing the public sector, the only way to pay for all this is to borrow more.

If that’s not bad enough, the cost of servicing this mounting debt pile is also predicted to balloon, placing a huge financial burden on future generations.

Almost £1 in every £3 of tax revenues will go on interest payments by 2074, compared to £1 in £14 today, according to the OBR.

The watchdog’s scary forecasts are based on Reeves’s preferred debt measure of debt called public sector net financial liabilities, or PSNFL, also known as ‘sniffle’ or ‘snuffle’. 

PSNFL is a broader measure of debt than the one now used, and includes investment benefits as well as costs, meaning debt ratios are lower for the same amount of actual borrowing.

For example, the new rule treats student loans as an asset – on the basis that some of the debt eventually will be repaid – instead of counting the whole of the loan book as a liability.

Even under this more favourable measure, the debt-to-GDP ratio is forecast to hit 269 per cent in 2074, versus 274 per cent under the old rule. But that’s not the half of it. 

The OBR’s forecasts make the rather heroic assumption that productivity will grow over the next five decades at 1.5 per cent a year.

If that fails to materialise, and we stay as unproductive as we have been in the past decade, debt will soar to more than six times GDP in 50 years’ time.

More public spending should eventually improve the economy’s growth potential. The OBR reckons GDP could be boosted by 1.4 per cent a year by 2074. 

And moving the debt goalposts may give the Chancellor some breathing room in the meantime and put the public finances on what she calls ‘a sustainable path’. 

But financial markets don’t seem to believe Reeves’s conjuring tricks. Government borrowing costs soared yesterday in a clear vote of no-confidence by investors in her plans.

Yields are at their highest since May, suggesting Labour’s honeymoon with those we rely on to pay our way in the world is over. 

Reeves may well talk a lot about investing for the long term. 

But like her predecessors, the Chancellor has her eye firmly on the here-and-now, not the next 50 years. Given the OBR’s doom-laden prognosis, you can hardly blame her.