Britain risks a deeper than expected economic slowdown if Jeremy Hunt sets out large tax rises and spending cuts at next week’s autumn statement, the Bank of England’s chief economist has warned.
Huw Pill said a tough fiscal settlement from the chancellor could weigh on the British economy by more than the central bank currently anticipates, in a development that would force it to rethink its approach to setting interest rates.
Asked in an online event if there was a risk that higher interest rates from the Bank alongside large tax rises and spending cuts could dampen the economy at a far greater rate than desired to tackle soaring inflation, he said: “There is a risk of that. But it is a risk we are very alive to.”
Pill said the central bank would take account of the hotly awaited debt-cutting plan when it next sets borrowing costs in December, and if Hunt’s interventions are larger than forecast then Threadneedle Street would probably “set interest rates a little bit lower” than would otherwise be the case.
Speaking in the event hosted by the Bank, Pill suggested that large tax rises could “slow down spending in the economy more than we expect”. This could in turn have an impact on inflation.
“What would we do? Well, other things equal, relative to where they would otherwise be, we would set interest rates a little bit lower. We speed the economy up, we boost spending through monetary policy in order to offset that effect,” he said.
The Guardian understands Hunt is preparing to announce tax rises and spending cuts totalling £60bn at the autumn statement as Rishi Sunak’s government attempts to restore investor confidence in Britain after Liz Truss’s botched mini-budget.
The chancellor is considering at least £35bn in cuts. The Financial Times reported on Monday that Hunt could use a stealth raid on inheritance tax to help fill the hole in the public finances.
Pill said that fiscal policy – tax and spending – was in the hands of the government alone and that he was not in a position to comment on what changes were right or wrong to make. However, he said it was important the central bank took into account changes the government was making, and that they would have an impact on its interest rate-setting plans.
“Crucially, we will have another meeting in December. We meet every six weeks. And so at that meeting in December we’ll be able to take what the government has done into account,” he said.
Last week the Bank raised interest rates by 0.75 percentage points to 3%, the biggest single rise in borrowing costs since 1989, despite warning that Britain risked being plunged into its longest recession in 100 years.
