UK Budget: Rising debt interest payments ‘could hit growth forecasts’

by | Oct 27, 2021

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Rising interest payments could hit the UK economy’s chances of 6.5% growth next year, economists said on Wednesday after the the government published its budget forecasts.
The government’s independent forecaster lifted its growth outlook for 2021 from the 4% it forecast in March, giving Finance Minister Rishi Sunak a £51bn windfall largely due to his lifting of the tax burden to it’s highest level since the 1950s.

In its forecasts, the Office for Budget Responsibility also revised down borrowing projections by £39bn in 2022-23, £35bn in 2023-34 and £34bn in 2024-25. Estimate of the long-term damage from the Covid pandemic over the next five years were cut to 2% from 3%.

Pantheon Economics chief economist Samuel Tombs said the fiscal squeeze set to hit the economy next year “still looks set to be intense”.

“The 4.4 percentage point fall in the cyclically-adjusted budget deficit in 2022-23 “will be bigger than seen in any other year since the Second World War, excluding the current fiscal year”, he added.

Tombs said Sunak would be hoping that households and businesses would spend a higher proportion of income towards pre-Covid levels, but warned that “households have been cautious so far”. Expectations for a rise in interest rates next month in response to persistent inflation was also a factor, he said.

“We think that the economy won’t fare as well as the OBR expects in 2022; our forecast for 4.8% year-over-year growth in GDP is well below the OBR’s 6%. This gap isn’t solely due to the OBR’s use of outdated historical GDP data, which leaves greater scope for a rebound over the coming years.”

“The Chancellor’s scope for pre-election tax cuts also might be reduced by rising debt interest payments. The OBR closed its forecast on September 24, so its interest payments forecast fails to capture the full impact of the recent rise in gilt yields and expectations for Bank Rate, as well as the impending boost to RPI inflation from higher energy prices.”

Tombs said he estimated the OBR would revise up its forecast for interest payments by about £9bn in 2022-23 and about £4bn in the long term, “if it used current market data”.

“This alone would reduce the Chancellor’s headroom in meeting his target for a current budget surplus to £21B, or 0.8% of GDP. That said, the rolling nature of the fiscal target still leaves scope for tax cuts, as long as they are temporary, or offset by other measures in the third year of the forecast.”

The OBR is forecasting a current budget surplus of £25bn in 2024-25, equal to 0.9% of GDP, and expects the underlying debt-to-GDP ratio to fall to 85.1% in 2024-25, from 85.7% in 2023-24.

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