Jeremy Hunt on track to ‘obliterate’ fiscal rules as OBR warns of much higher debt bill
Jeremy Hunt is on track to blow out his financial goals due to the Bank of England hiking interest rates aggressively to bring down sticky inflation, according to new forecasts out today from the UK’s spending watchdog.
Payments to investors who have purchased UK government debt are poised to rise more than £90bn above what the Office for Budget Responsibility (OBR) forecast at the budget in March.
Crucially, the OBR said debt interest payments will be £13.7bn higher than previously projected in 2027/28, which would erode the Chancellor’s headroom against his fiscal rules.
Hunt and Prime Minister Rishi Sunak want to get debt as a share of GDP and annual borrowing to no higher than three per cent of GDP in five years’ time. The OBR in March said under current tax and spending plans, the pair were hitting that goal by a margin of £6.5bn, the slimmest of any government since the OBR was created in 2010.
Cara Pacitti, senior economist at the Resolution Foundation, told Morning Wire: “The escalating cost of servicing government debt alone… is enough to obliterate the current fiscal rules.”
“This means that the current government – and indeed the next one – will need to face up to some tough choices on tax and spend, rather than compete over big pre-election giveaways,” she added.
Services and core inflation – measures viewed as more accurate snapshots of inflation’s stickiness – jumped to more than seven per cent.
As a result, financial markets have been ratcheting their bets on how high Bank Governor Andrew Bailey and the rest of the nine-strong monetary policy committee (MPC) will have to jack up borrowing costs to stomp on price pressures.
“On 30 June, Bank Rate expectations rose to 5.8 per cent compared to 4.1 per cent during our March forecast in 2023-24,” the OBR in its fiscal risks and sustainability report said today.
As a result, “debt interest payments [would increase] by £13.7bn in 2027-28 alone and by a total of £91.5bn across the medium term” all else equal, the report said.
“Such large increases in a relatively short time period illustrate how sensitive the fiscal position is to increases in interest rates,” it added.
The MPC has elected to raise the UK’s official interest rate 13 times in a row to a near 15 year high of five per cent. They are tipped to repeat last month’s 0.5 percentage point increase at their next meeting on 3 August.
Today’s forecasts do not take into account future developments in the UK economy. At the next budget, due this autumn, the OBR will produce a fuller projection that accounts for GDP growth. Any expansion upgrade would push the Chancellor closer to achieving his fiscal goals. Higher inflation can boost the government’s revenues as well by raising work-related tax receipts.
Millions of workers are being dragged into higher rate tax bands due to employers giving them a pay rise amid high inflation, a process known as “fiscal drag”. Hunt and Sunak have frozen income tax bands until 2027/28.
“We won’t be making a formal assessment of the government’s performance against its fiscal rules until we produce our next forecast in the autumn,” the OBR told Morning Wire
“Of course, there are a large number of other factors at play and developments in the economy will need to be taken on in the round in order to develop that forecast,” the organisation added.
The OBR also said greater welfare and health spending amid an ageing population, compounded by the government losing tax revenues and stepping up investment spending on its way to Net Zero, may push national debt as a share of the economy to over 300 per cent by the 2070s. It is currently around 100 per cent.
A Treasury spokesperson said: “This report reaffirms our need to be disciplined with the public finances. Additional borrowing right now would fuel inflation, push up mortgage rates and hike up debt interest repayments – diverting money away from our public services.”