Soaring borrowing costs have left UK Chancellor Jeremy Hunt facing a more difficult fiscal position in his economic statement next month than in March, all but ruling out the tax cuts his Conservative Party wants.
(Bloomberg) — Soaring borrowing costs have left UK Chancellor Jeremy Hunt facing a more difficult fiscal position in his economic statement next month than in March, all but ruling out the tax cuts his Conservative Party wants.
Hunt told reporters at a briefing in Marrakech Friday that “the financial picture I face is worse than in the spring. That means I will have to take difficult decisions.”
At the March budget, the chancellor was judged to have just £6.5 billion ($7.9 billion) of headroom against his rule that debt must be falling as a share of GDP in five years. No chancellor has passed his own tests with so little space to spare since the Office for Budget Responsibility was set up to monitor the public finances in 2010.
The worsening of the outlook has been driven primarily by higher interest rates, which have sent the cost of servicing the national debt spiralling, Hunt said. “We are likely to see increase in our payments for this year of between £20 billion to £30 billion ($36.6 billion), that’s a huge change.”
Asked about tax cuts, Hunt said “we are not in that territory.”
Trailing the opposition Labour Party in opinion polls, many Conservative Party MPs want Hunt to lower the tax burden ahead of a general election widely expected to be held next year. However, Hunt may instead be under pressure to raise taxes to fill a fiscal hole.
He said: “We will do everything we possibly can to prevent tax rises. We all also show we can reduce the tax burden over time. We will be honest that there are no shortcuts to reducing tax.”
Laura Papi, deputy director of the International Monetary Fund’s European department, said the fund was encouraged by statements by the chancellor that he does not envisage tax cuts in the Autumn Statement. Longer term, the UK needs to rebuild fiscal buffers for the next shock and should do by raising taxes and reforming an expensive state pensions guarantee known as the triple lock.
Hunt was speaking after the OBR delivered its first set of forecasts for the Autumn Statement on Nov. 22. Asked about its growth projections, Hunt said he could not comment on the content of the forecasts as “we are still going through that process with the OBR.”
He added that the OBR “has been one of the most optimistic among forecasters in terms of our long-term growth rate.”
Hunt is attending the IMF meetings in Marrakech, where the Washington-based lender downgraded its UK growth forecast for next year to just 0.6%, the slowest of all Group of Seven advanced nations.
“When it comes to the IMF, I think it’s fair to say, with the greatest respect to the IMF, that they have been wrong more often than they have been right when it comes to forecasts about the British economy.”
He added that the IMF’s forecasts did not take account of the recent upgrade to the level of UK output by the Office for National Statistics. “What the IMF says to me is the British economy is on the right track,” Hunt said.
Papi said the Bank of England had also underestimated growth in recent years and “the IMF has not been particularly pessimistic.”
(Adds IMF comments)
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