The government is being warned that Pufins borrowing risk UK public finances at a time of acute bond market pressure, after analysts at Oxford Economics said ministers appear likely to use off-balance-sheet institutions to fund higher infrastructure and housing spending without breaching their own fiscal rules.
Andy Burnham and John Healey have been put on notice that deploying so-called Pufins, short for public financial institutions, to shift borrowing off the government’s formal accounts could unsettle gilt markets already on edge over extra issuance. The warning comes as bond market volatility continues to weigh on the cost of long-term government borrowing.
What are Pufins and how would the mechanism work?
Pufins work by routing additional borrowing through bodies such as the British Business Bank and the National Wealth Fund. Because assets held by those institutions offset the liabilities on the government’s balance sheet, the extra debt would sit outside the strict fiscal rules covering debt and the budget balance that Healey has publicly committed to.
Oxford Economics researcher Andrew Goodwin said the approach carried real dangers in the current environment. ‘Using an accounting trick to loosen policy in a significant way would be risky given the current febrile bond market backdrop,’ Goodwin said. ‘Any extra borrowing must still be financed via higher gilt issuance.’
Goodwin also warned that the use of Pufins could ‘threaten the credibility’ of Healey’s commitment to fiscal prudence amid a difficult economic backdrop. He described the government’s plan to reduce borrowing as ‘relatively weak’, noting that much of the tax increases announced by Rachel Reeves last year would only take effect later in Labour’s term.
The scale of what is contemplated through these institutions is substantial. Financial Post has reported that a £16 billion injection into the National Wealth Fund is planned over the next five years, underlining just how much additional capital the government intends to route through public financial institutions rather than via conventional on-balance-sheet spending.
Pufins borrowing risk compounded by gilt yields and energy costs
Oxford Economics said the backdrop makes the Pufins route particularly exposed. Higher long-term gilt yields, driven by a global bond market rout, could cost the government up to £9bn more than previously expected. That figure sits alongside a separate pressure: higher UK energy costs, pushed up by international oil prices approaching $100 per barrel due to the continuation of the Iran war, could add further strain ahead of Healey’s first Budget.
An ongoing freeze on tax thresholds will also squeeze real household incomes, Oxford Economics researchers said. The government has indicated it is prepared to announce further measures to ease cost of living pressure on families, though Goodwin predicted the Prime Minister would need to keep any such measures ‘low-cost’ and ‘low-impact’.
‘So far, markets have largely given the new administration the benefit of the doubt,’ Goodwin said. ‘But its first fiscal set-piece will send an important signal and a material loosening of policy would likely cause markets to react badly.’
The government is currently projected to spend about £137bn on debt interest payments in 2030, more than double what it spends on defence and higher than total education expenditure across the country.
That debt interest trajectory sits in some tension with the monetary policy backdrop. BBC News has reported that interest rates have been cut six times since the 2024 election, a sequence that has reduced the cost of shorter-term borrowing even as longer gilt yields have risen. In a separate development, Healey also announced a £150m fund from the British Business Bank aimed at the most innovative scale-ups in the north of England, a deployment that itself runs through the kind of public financial institution at the heart of the Pufins debate.
Public concern over rising borrowing costs
News of traders’ unease over government bond returns has reached voters. City AM and Freshwater Strategy polling found that about 73 per cent of people were concerned about the impact of rising interest rates for long-term government borrowing, while 22 per cent said they were not very concerned or not at all concerned and 5 per cent were unsure.
A majority of those surveyed also said the government should reduce borrowing. About 40 per cent said it should do so by cutting public expenditure, while 22 per cent said borrowing should be reduced through higher taxes. Some 23 per cent believed the government ‘should accept higher borrowing rather than cut spending or raise taxes’. Freshwater Strategy interviewed 1,249 eligible UK voters aged 18 and over online between 4 and 6 September 2026, with a margin of error of plus or minus 2.8 per cent.
With the first Budget now approaching, the response of gilt markets to whatever Healey announces will determine whether the Pufins route survives contact with investors or is quietly shelved.
