Rachel Reeves plan to borrow more to avoid austerity could trigger mortgage rate spike

Unions have been urging Chancellor Rachel Reeves to rip up the fiscal rules so the Government can borrow more to spend on repairing the country - and avoid another round of devastating austerity

Rachel Reeves's plan to rip up borrowing rules to spend more on repairing the country risks pushing up interest rates, official analysis suggests.

Modelling from the Treasury in December indicates that changing the rules to allow for more borrowing to invest could increase the cost of debt for consumers and businesses. The analysis, seen by the Sunday Telegraph, warned that every increase in annual borrowing of £25billion could increase interest rates by between 0.5 and 1.25 percentage points.

The analysis sparked fears that families with mortgages could be impacted by higher interest rates, which shot up in the wake of the economic turmoil triggered by Liz Truss's disastrous mini-budget in 2022.

It comes as the Chancellor scrambles to find extra cash to fix the dire inheritance left by the Tories, while keeping Labour's manifesto promise not to hike to taxes on working people. Ms Reeves has signalled she could ease borrowing rules in the Budget on October 30, in a bid to free up £50billion of extra spending.

The move, which would involve tweaking how debt is defined, would allow her to borrow tens of billions of pounds more for investment into projects like transport and clean energy schemes. Union leaders have been urging the Government to act so it can funnel more cash into infrastructure - and avoid inflicting another round of austerity on crisis-hit public services.

Economists have also warned the Chancellor that under-investment has led to a “vicious circle of stagnation and decline" - and said Labour would fail to deliver its promised "decade of national renewal" if she makes more cuts.

The Chancellor gave her clearest sign yet that she plans to increase borrowing to fund a multi-billion-pound capital programme, pledging to “invest, invest, invest” on Saturday.

The Prime Minister last month refused to say whether he would rip up the fiscal rules in next month's Budget to let the Government borrow more to spend on repairing the country. Speaking to reporters in Rome, Mr Starmer said: "It’s really important - the number one priority of this government is economic growth and all decisions will be made against that objective."

A Treasury spokeswoman said: “This analysis is clear that the relationship between fiscal plans, inflation and interest rates is complicated and can change significantly over time. The Chancellor has repeatedly said she will not play fast and loose with the public finances and will protect working people.”