Sajid Javid has fuelled speculation that he is planning a voter-friendly budget next month after predicting that interest rates will remain at rock bottom levels and give him the scope to increase government borrowing.
The chancellor said he was convinced that low interest rates were here to stay and that it was his job to see how he could exploit the changed circumstances to boost the economy.
Javid said it made sense for the government to borrow for infrastructure projects when it could do so at rates of interest that were very low or even negative when adjusted for inflation.
But his comments, at a press briefing in Washington, will add to speculation that a package of tax cuts is being planned for the budget on 6 November.
“I have believed for a while, for the past two to three years but especially for the past year, that with interest rates where they are today it makes sense to borrow and spend the money where it can be put to good use, into rock-solid infrastructure and to boost our productivity. That’s a sensible thing to do,” the chancellor said.
“I traded in the bond markets for 20 years and never saw anything like this. I have got to assess what that means for the economy. I wouldn’t be doing my job if I didn’t take the situation seriously.”
The UK’s current fiscal rules require the government to keep borrowing adjusted for the state of the economy below 2% of national output in 2020-21 and for national debt to be falling as a percentage of GDP.
The extra borrowing caused by the combination of a slowing economy and the most generous public spending round in 15 years has meant borrowing will top 2% of GDP next year, forcing the chancellor to come up with a new fiscal framework.
“It is clear the UK will always have a strong fiscal anchor and I will make sure spending decisions are well merited in the interests of transparency,” he said.
Javid added that while fiscal discipline was important, it didn’t mean that one set of fiscal rules should exist for ever. The International Monetary Fund has urged countries to use fiscal policy more actively when they can afford to do so.
“When the circumstances change you should change the rules,” Javid said. “There are record low interest rates that will be low for a long time. That’s my view and it is shared by serious economists. Britain faces a productivity challenge and it is right for me to look at what more I can do.”
