Chancellor Rishi Sunak is braced for an increase in interest bill

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Under pressure: Fears about the outlook for borrowing and the pressures building for more spending have led Chancellor Rishi Sunak to batten down the hatches


Chancellor to address concerns that scale of public borrowing and debt will lead to a sharp rise in the Government’s interest rate bill in 2021-22 and beyond

  • Consumer price inflation surged to 2.5 per cent in June, leading to concerns at the Bank of England that monetary policy may have to be tightened
  • In recent days two members of the Monetary Policy Committee have indicated that the time to withdraw monetary stimulus is fast approaching
  • Such a step would be likely to force up market rates and the cost of servicing UK government debt 
  • The national debt stands at 99.2 per cent of the country’s output – the highest it has ever been in peacetime 

Rishi Sunak is gearing up for a tough public spending round and financial statement this autumn amid concerns that the scale of public borrowing and debt will lead to a sharp rise in the Government’s interest rate bill in 2021-22 and beyond. 

Consumer price inflation surged to 2.5 per cent in June, leading to concerns at the Bank of England that monetary policy may have to be tightened as soon as August 5 when the interest rate setting Monetary Policy Committee (MPC) holds its next meetings. 

In recent days two members of the MPC – deputy governor Dave Ramsden and external member Michael Saunders – have indicated that the time to withdraw monetary stimulus is fast approaching. 

Under pressure: Fears about the outlook for borrowing and the pressures building for more spending have led Chancellor Rishi Sunak to batten down the hatches

Such a step would be likely to force up market rates and the cost of servicing UK government debt. Official public borrowing data shows that in the first two months of this fiscal year there was an £18.3billion undershoot on the forecast made by the Office for Budget Responsibility in March. 

The lower than projected borrowing arises from a £25billion fall in government spending on last year and larger than expected corporation and VAT tax receipts as the economy recovers its momentum. 

The national debt stands at 99.2 per cent of the country’s output – the highest it has ever been in peacetime. As inflation surges and market interest rates climb, there is concern among government officials that the cost of servicing the debt will wipe out the improvement in the public finances. 

Fears about the outlook for borrowing and the pressures building for more spending on everything from social care to education have led Sunak to batten down the hatches. Defending the £4billion cut in the foreign aid budget last week, the Chancellor said: ‘We have to be clear-eyed… Covid has severely damaged our public finances.’ 

The Treasury calculates that an increase of 1 per cent in the retail prices index would raise the debt interest rate bill by £6.9billion because of the large amounts of inflation-linked gilt edged stock, while a one percentage point increase in interest rates could ratchet up government spending on debt interest by £17.9billion in 2022-23.

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