Chancellor Jeremy Hunt has issued a warning about the need for “difficult decisions” in the upcoming autumn statement due to a significant deterioration in the country’s public finances over the last six months. Hunt expressed concern that state borrowing could exceed initial predictions made in March by £20 billion to £30 billion, erasing any room for tax cuts. Despite this, he ruled out imposing additional tax increases in the autumn statement, aiming to minimize the risk of pushing the already stagnant UK economy into a recession by focusing on spending cuts.
Hunt conveyed this message during the annual meeting of the International Monetary Fund in Marrakech. The Governor of the Bank of England, Andrew Bailey, also warned that high-interest rates were expected to persist for a considerable period.
The chancellor attributed the worsening fiscal situation to an increase in interest rate projections for economies globally, including the UK. He expected debt interest payments to surge by £20 billion to £30 billion, posing a significant challenge.
At the time of the budget, the Office for Budget Responsibility (OBR) had suggested the chancellor had a buffer of only £6.5 billion to meet the fiscal rule of reducing national debt as a share of national income over five years. The increased borrowing during the COVID-19 pandemic has pushed the national debt above £2 trillion.
Hunt anticipates that the OBR will revise down its future growth forecasts for the UK economy, further straining public finances. He emphasized the need to make savings rather than borrow more to accommodate tax cuts, ensuring the UK’s resilience to future shocks.
Bailey cautioned against overenthusiasm regarding the decline in inflation and emphasized the challenges ahead. He stated that the last phase of returning to the inflation target would be the most challenging, considering the current restrictive policy environment, which could dampen economic prospects.
Hunt asserted that additional tax hikes to fill the fiscal gap were not under consideration, as taxes as a share of national income were already on a path to reach their highest levels in decades. His objective was to boost Britain’s long-term growth prospects, focusing on public sector productivity improvements and increased business investments in the forthcoming autumn statement.
While there was a consensus among some economists and the Labour party that taxes would inevitably rise, Hunt believed there was room to change this trajectory. He stressed the importance of increasing growth from the current 1-2% to the 2-3% range, which was the long-term challenge.
Bailey noted that the Bank’s decisions on interest rates would remain finely balanced, especially after the previous 5-4 split on the monetary policy committee to maintain borrowing costs at 5.25%. He stated that it was evident that the 14 interest rate hikes since December 2021 were exerting downward pressure on economic growth, and sustaining the 2% inflation target was crucial for a more favorable outlook.