Sunak Sees Inflation Risk to U.K. Debt Costs Ahead of Budget

“I have to think about what might happen to us in the future, and build into our plans some resilience to cope with that uncertainty or the potential adverse shocks that come our way.”  

The chancellor, who’s called it his “sacred” duty to restore fiscal rigor to public finances after the pandemic, is preparing to deliver his budget against a backdrop of a stuttering economic recovery.

While that’s set the scene for what’s expected to be a restrained statement with few big giveaways, he pledged on Sunday to plow more money into public services, and also provide extra support for hard-up families.

Still, the chancellor’s task is complicated by the growing threat of faster inflation — which is forecast to exceed 4% this year — and the prospect of interest-rate increases from the Bank of England that could start as soon as next month. Both would increase the cost of servicing a U.K. debt load that swelled during the pandemic and now stands close to 100% of economic output. 

The Treasury estimates that for every percentage point increase in interest rates, market borrowing costs and inflation adds 25 billion pounds ($34.4 billion) to public borrowing annually. 

There isn’t a “magic wand” the government can use to bring down inflation, which has mainly been pushed higher by global factors, Sunak said, citing high energy prices and the strain on supply chains caused by economies re-opening after the pandemic. 

Still, in an article for the Sun newspaper this weekend, Sunak promised to support families feeling the pinch from rising energy and food costs. “I want you to know, we will continue to do whatever it takes, we will continue to have your backs — just like we did during the pandemic,” he wrote.

The chancellor has come under growing pressure from across the political spectrum to address the cost-of-living crisis hitting families. Members of his own Conservative Party have called on him to slash value added tax on energy bills to zero, and to freeze alcohol duties in order to boost bills. 

Shadow Chancellor Rachel Reeves told Sky News on Sunday that helping people with the cost of living would be the main opposition Labour Party’s priority in the budget, as she also called for a cut in the VAT tax on energy bills. “People have been facing now a tough winter with the prices of everything going up, not least our gas and electricity bills,” she said. 

In an effort to balance the books, Sunak’s already frozen income tax thresholds and public sector pay, cut foreign aid, announced plans to raise corporation tax by six percentage points from 2023, and unveiled plans for a new tax on workers, employers and dividends to fund health and social care. 

On Sunday, he told the BBC, “I wish I didn’t have to raise taxes,” before hinting he’s of a mind to cut taxes in future years.  When asked if he would be a “tax-cutting chancellor,” he said “my instincts are to do that.”

He also said he’ll use the budget to unveil the conclusions of a review into business rates levied on bricks-and-mortar shops and offices. With businesses calling for wholesale reform of the levy and the Labour Party saying it should be scrapped, Sunak suggested changes will be more limited, pointing out they raise 25 billion pounds a year for the public purse.

While the Spending Review is expected to put a squeeze on some departmental budgets, extra cash may also be made available. Sunak is preparing to unveil an additional multibillion-pound boost for NHS, the Sunday Telegraph reported, including funds for a digital overhaul.

The “budget is about the future, it’s about building that stronger recovery for our country,” Sunak told Sky. 

“It actually means very strong continued investment in public services. It means driving our future economic growth by investing in infrastructure, innovation and skills…It means giving businesses confidence through all the things we’re going to do to support them, and lastly it means supporting working families as we have done through the last year.”

The budget also comes against a backdrop of rising virus cases. When pressed on whether the government was on course to bring in additional restrictions this winter, Sunak told the BBC that the data doesn’t currently suggest a move is needed to the so-called Plan B of harsher measures. 

A return to the furlough program that saw the government pay as much as 80% of the wages of idled workers is “not on the cards because we don’t envisage having to impose significant economic restrictions in the way that we had to over the last year,” he said.

Source: Bloomberg Business News