Autumn Statement 2016: Could higher borrowing costs upset Philip Hammond's plans for an infrastructure spending spree?

Jake Cordell
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Ministers Attend David Cameron's Last Cabinet Meeting
What will be in Hammond's red box on 23 November? (Source: Getty)

Interest rates for the UK government are rising at one of their fastest rates in nearly two decades as chancellor Philip Hammond prepares to unleash a multi-billion pound spending spree in his first Autumn Statement in five weeks' time.

Borrowing costs for Hammond, as measured by the yield on the benchmark 10-year government bond, have surged in recent weeks as the UK economy prepares for a period of rising inflation as a result of the pound's dramatic post-referendum slump.

"The government bond sell-off has sent gilt yields to the highest since the EU referendum, putting them on course for one of the biggest monthly rises in 20 years," said CMC Markets' Jasper Lawler.

Yields jumped another six basis points today to hit 1.15 per cent - up from an all-time low of 0.52 per cent in August. With the government running a £70bn shortfall last year, total debt standing at 84 per cent of GDP and Hammond pledging a "fiscal reset" in the 23 November Autumn Statement, higher borrowing costs could be on the mind of Number 11's newest occupant.

Economists are divided over whether Hammond will let rising yields play a part in his thinking as he considers loosening the purse strings.

"I suspect that gilt yields could head higher still before the Autumn Statement," IHS Markit's Howard Archer told City A.M.

Read more: Should Philip Hammond cut VAT?

"Hammond will likely be disappointed with the rise in borrowing costs and it may temper the amount of extra borrowing he will be prepared to take on," Archer added.

However, Scott Corfe at the Centre for Economics and Business Research (CEBR) said he "expects Hammond to announce a big fiscal loosening in the Autumn Statement - both spending increases and tax cuts - whatever happens to gilt yields between now and then".

Corfe added: "The need to shore up the economy is too important to not do so."

By historic standards, borrowing costs are still at one of their lowest levels in centuries given the ascendancy of loose monetary policy and ultra-low interest rates across the developed world.

In terms of what shape any extra spending could look like, expectations are that the Autumn Statement will focus on infrastructure investment, although Hammond has repeatedly indicated he is not about to go on a massive spending spree without keeping one eye on fiscal prudence. Economists think this will mean more of an acceleration of projects which are already scheduled, rather than a smattering of brand new roads and railways popping up across the country.

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