Debt payments soar as Chancellor borrows more

Labor will shell out an extra £17.5bn servicing debt interest over the course of Parliament after Rachel Reeves changed borrowing rules, Goldman Sachs has predicted.

The Chancellor will use a different measure of debt to borrow up to £50bn more for additional investment, while still meeting a target to start reducing debt within five years.

Reeves’ goal is to boost growth, but those effects will take time and debt will increase in the short term, Goldman experts said.

Also driving the rise in interest payments will be a slightly higher-than-expected trajectory of the Bank of England’s interest rates than forecast in March’s spring budget.

This means a “somewhat higher forecast for interest expenses” for the rest of this year, according to the analysis. The model assumes annual interest payments around £3.5 billion higher on average over five years.

Reeves is expected to get a boost when Britain’s annual growth forecast is updated from 0.8 per cent to 1 per cent on Wednesday, but he has been warned he risks wasting it by raising taxes.

The UK enjoyed the best growth in the G7 during the first half of this year, defying the pessimism of Labor ministers including Reeves.

Investec economist Philip Shaw said: “We are skeptical of Reeves’ claims that Labor has inherited the worst economic legacy since the Second World War. It cannot be said that the economy is worse off than in 2010. when the Western world was still stagnant after the global financial crisis.’

Reeves has said the new government will be “the most pro-growth” Britain has ever seen.

But businesses fear that ambition will be undermined by their plans to announce a series of tax rises in the Budget.

A Lloyds survey shows business confidence has fallen to its lowest level in four months. This follows surveys showing confidence between businesses and households has plummeted in the face of Labour’s rejection. Fears of tax increases have also taken their toll.