The chancellor, Jeremy Hunt, has warned that the government will need to take “difficult decisions” in next month’s autumn statement after a sharp worsening of the public finances over the past six months.
Hunt said state borrowing was on course to be £20bn to £30bn higher than predicted at the time of the budget in March – wiping out what little room he had to cut taxes.
He has ruled out fresh tax rises in next month’s autumn statement and hopes to cut spending in a way that minimises the risks pushing an already flatlining UK economy into recession.
Hunt’s gloomy message from the annual meeting of the International Monetary Fund in Marrakech was accompanied by a warning from the governor of the Bank of England, Andrew Bailey, that interest rates were likely to stay high for some time.
The chancellor said: “The fiscal position has worsened since the spring and I will have to take difficult decisions in the autumn statement.
“The main reason things are more challenging is because interest rate projections for all economies have gone up. The UK is not immune to those changes. We are likely to see an increase in debt interest payments of £20bn-30bn and that’s a huge challenge.”
At the time of the budget, the Office for Budget Responsibility (OBR), said the chancellor had only a £6.5bn buffer to meet his fiscal rule of having debt as a share of national income falling at the end of five years. Higher borrowing in response to the Covid 19 pandemic has pushed the national debt above £2tn.
Hunt is braced for the OBR to cut its future growth forecasts for the UK economy – which would pile additional pressure on the public finances. “The OBR has been one of the most optimistic about the long-term growth rate among forecasters,” the chancellor said.
Hunt added that he was not prepared to borrow more to finance the tax cuts being demanded by some Conservative MPs and would instead seek to make savings to pave the way for a more generous budget next spring.
“I have to make sure the UK is resilient to shocks going forward,” Hunt said. “Increasing borrowing would be reckless and the wrong thing to do”.
Bailey said it would be a mistake to get too carried away with the fall in inflation – which is down from a peak of 11.1% to 6.7% – saying there was “an awful lot left to do”.
He added: “The last mile is going to be the hardest to get us back to target. Policy is acting in a restrictive manner, and it needs to do so. That does have an impact on the outlook for the economy, which is pretty subdued.”
Hunt made it clear tax rises to fill any black hole in the public finances were not being considered.
Taxes as a share of national income are already on course to rise to their highest in 70 years later this decade, and the chancellor said he was unwilling to add to the “burden”.
“I will do everything I can to prevent tax rises and also show how I can reduce the tax burden over time. But I have to be honest – there are no short cuts. Borrowing to finance tax cuts is no tax cut at all. It just passes on the cost to a future generation.”
Hunt said his aim was to boost Britain’s long-term growth prospects, and the autumn statement will include measures to improve public sector productivity and increase business investment.
“All western economies have found themselves in a low-growth trap,” the chancellor said. “The autumn statement will show how we can get out of it.”
Hunt said there was a consensus among “many economists and the Labour party” that taxes would inevitably continue rising as a share of national income. “I don’t believe it does,” he added.
“The big picture is that we need to move from a paradigm where growth is 1-2% back to the 2-3% it used to be. That’s the long-term challenge.”
Bailey said the Bank’s decisions on interest rates would continue to be tight affairs, after the 5-4 split on its monetary policy committee to keep borrowing costs on hold at 5.25%.
Speaking at an Institute of International Finance meeting, the governor said it was now clear that the 14 interest rate increases since December 2021 were weighing down on growth. “If we don’t get back to (the 2% inflation) target sustainably the outlook will be worse.”
