Rishi Sunak and Jeremy Hunt are on course to oversee the UK’s debt burden swelling to more than the size of the entire economy, putting one of the pair’s five pledges to taxpayers in peril, according to new forecasts out today.
Britain’s debt to GDP ratio is tipped to climb to just over 101 per cent in 2028, the International Monetary Fund (IMF) has projected.
The Prime Minister and Chancellor have promised to get the debt pile falling in five years, one part of the Conservatives’ fiscal rules. There’s a risk they will miss that target if the IMF’s forecasts materialise.
IMF officials’ calculations run counter to those published by the Office for Budget Responsibility alongside last month’s budget in which the spending watchdog judged Sunak and Hunt would hit their fiscal targets by around £6bn, the slimmest margin of any administration ever.
The lender of last resort calculates debt forecasts a bit differently than the OBR, partly explaining the difference in outcomes.
Hunt injected around £20bn into the economy last month via a package of expanding childcare support and tabling tax reliefs for firms that invest.
He had reined in spending and raised taxes by around £55bn at the autumn statement in November in response to Liz Truss’s mini budget in September.
Sunak and Hunt have promised to trim the debt pile, halve inflation this year and tackle NHS waiting lists, among others.
Britain’s debt stock is set to rise due to a combination of weak economic growth and intensifying pressure on public services, mainly caused by an ageing population propelling spending on the NHS and higher debt interest spending due to Bank of England hiking interest rates eleven times in a row to 4.25 per cent to tame inflation raging to a 40-year high of 10.4 per cent.
The IMF said yesterday the UK economy will be the worst performing among the G7 this year, shrinking 0.3 per cent.
Germany is tipped to be the only other rich nation to experience a contraction this year, although the UK did receive the largest GDP upgrade among its peers.
Debt stocks across the rich and developing world have swelled over the last half decade or so due to governments stepping in with enormous support packages to offset the impact of lockdowns to contain the Covid-19 virus.
In 2021 and 2022, when countries started to return to pre-pandemic levels of economic activity, debt stocks slimmed.
But the return of scorching inflation – for the first time since the 1980s – and central banks’ moves to contain it with sharp interest rate hikes has damaged public finances.
In each of the next five years, debt burdens in the rich world will rise, peaking at 80.2 per cent in 2028, according to the IMF.
The IMF urged governments to work in tandem with monetary authorities trying to tame inflation by not launching overly generous spending packages or cutting taxes too liberally.
“Stronger fiscal balances contribute to cooling off aggregate demand and, hence, moderate the required increase in policy rates,” Vitor Gaspar, director of the fiscal affairs department at the IMF, said.
“In addition, rebalancing public finances helps limit public finance risks, and a more balanced policy mix contributes to financial stability, reducing the risk of observing fiscal-financial feedback loops,” he added.
Liz Truss’s £45bn of unfunded tax cuts at September’s mini-budget sparked a run on the pound and forced UK debt rates up at the fastest pace in 20 years, forcing the Bank of England to launch an up £65bn emergency bond buying package to contain turmoil in the pension market.
Gaspar today commended Hunt for prioritising medium term fiscal targets at last month’s budget.
The Treasury has been contacted for comment.