Tax cut hopes fade as UK debt interest bill soars
- Public debt figures raised hopes of gifts from the Chancellor
- But a sharp rise in borrowing costs would eat away at what little room for maneuver Hunt has.
- Sticking to this plan is key to staying calm in financial markets, experts say
Rising interest rates on Britain’s debt appear poised to extinguish any prospect of meaningful tax cuts before the election, economists have warned.
Hopes that Chancellor Jeremy Hunt has room for large donations rose last week when public borrowing figures came in lower than expected.
But rising interest rate expectations and higher yields on UK government bonds, known as gilts, suggest that the cost of servicing the massive government debt over the next five years could be as much as £150bn more. than previously thought, according to an analysis by Pantheon Macroeconomics. .
Such a steep rise in borrowing costs would wipe out what little room for maneuver Hunt has if he wants to meet his goal of reducing debt as a share of economic output over the next five years. Sticking to this plan is key to staying calm in financial markets, experts say.
Under pressure: Prime Minister Rishi Sunak and Foreign Minister Jeremy Hunt
“The turmoil that followed last autumn’s mini-budget suggests that markets are likely to be less willing to tolerate plans that are not credible, especially given the economic context,” said Samuel Tombs, chief UK economist at Pantheon. “We are confident in our assumption that the Chancellor will not announce significant tax cuts later this year.”
The sober analysis is likely to dampen hopes for tax cuts sparked by last week’s better-than-expected public sector finance numbers.
They showed that government borrowing for the first four months of the financial year (April to July) was £56.6 billion. This is £11.3bn less than the Office for Budget Responsibility, the fiscal watchdog, expected in March.
But there were also unwanted surprises in the details. Spending rose thanks to public sector wage deals as the government sought to end harmful strikes.
And interest payments on the £2.6 trillion government debt were higher than expected. This is partly because the rate paid on part of the debt is linked to inflation, which has not fallen as fast as expected. This means that debt interest expense for the financial year to date has been £37.8bn, £1.9bn more than the OBR expected in March.
Debt interest expense last year amounted to almost £107bn, and is projected to reach a still staggering £94bn this fiscal year.
Overall, the public finance outlook for this year looks healthier than before, but the longer-term outlook is more worrisome. Tombs said that, based on the latest data, the OBR would have to revise its forecast of interest payments on the debt in each of the next five years.
He said he would have to increase it by around £40bn in the next fiscal year (2024-25) and by £20bn five years from now, for a total of £150bn over five years.
The worse-than-expected picture is a challenge for Hunt because the OBR believes that – to meet its debt target – it only has £6.5bn of tax space to play with. This is the smallest margin since the watchdog was created 13 years ago.
Ruth Gregory of Capital Economics said: “We think Hunt will have little room to reveal big permanent tax cuts and/or spending increases in the Fall Statement without jeopardizing his fiscal rules.”
It is under pressure to eliminate tourism and inheritance taxes and reduce corporate tax. But it is understood that he prefers to boost growth through a pension fund reform, unlocking £50bn of investment in UK technology and infrastructure.