Commenting ahead of the forthcoming budget as the Chancellor looks set to alter fiscal rules to boost investment, Chris Arcari, Head of Capital Markets, Hymans Robertson, says:

"We expect the government to announce plans to borrow more than previously forecast in the autumn budget. But the government’s long-term growth and investment ambitions need not be beholden to short-term volatility in the gilt market.

"The expected plan to change debt definitions to take account of more ‘certain’ long-term assets is sensible, and many would argue it’s long overdue. Ultimately, this change will let the government borrow more to invest. We’re in favour of this approach.

"It’s important for the market to distinguish between borrowing to invest and borrowing to fund day-to-day spending. But there’s also an onus on the government to maintain market confidence about the supply of new gilts. It will need to find buyers for these. If gilt yields rise too high and stay high, private investment could be crowded out, which would go against the government’s stated ambitions.

"However, we think it’s possible to avoid this scenario while still freeing up headroom to borrow to invest which our paper explores in more detail. The government, under full Office for Budget Responsibility scrutiny, is likely to use only some of the headroom created by changes to debt definitions. We expect the government to maintain the key fiscal rules, with tax rises in the medium-term helping to balance day-to-day spending. If new borrowing is directed towards productive investment, it should reduce the debt-to-GDP ratio, all else being equal. This reduction would help to unwind any supply-risk premium the market may reflect in the short term.”