Rishi Sunak warns over UK debt pile risk if interest rates spike

Rishi Sunak braces Britain for tax rises warning the country’s huge coronavirus-fuelled debt pile could be a disaster if interest rates spike

Rishi Sunak has delivered another strong hint that tax rises are on the horizon as he warned the UK’s huge coronavirus-fuelled debt pile could be a disaster if interest rates rise.

The Chancellor highlighted the risk as he said the scale of the liabilities, which are set to hit £2.8trillion by 2025, makes Britain ‘sensitive’ to market forces.

He cautioned that no-one had a ‘crystal ball’ to say what inflation and interest rates will do. 

Treasury watchdog the Office for Budget Responsibility gave a grim picture of the hit from the pandemic last week. 

Borrowing is expected to hit £394billion this year as the economy shrinks by 11.3 per cent – the worst recession in more than 300 years. 

The OBR predicts that ministers will be borrowing at least £100billion a year into the middle of the decade, as ‘scarring’ means the economy will be between 3 per cent and 6 per cent smaller by 2025 than it otherwise would have been.  

It said ‘merely to stop debt rising relative to GDP’ tax rises or spending cuts worth between £21billion and £46 billion will be required.  

Adding a penny to the basic rate of income tax only brings in roughly £6billion a year.

Rishi Sunak (pictured at Hamleys yesterday) has delivered another strong hint that tax rises are on the horizon as he warned the UK’s huge coronavirus-fuelled debt pile could be a disaster if interest rates rise

Treasury watchdog the OBR predicted last week that ministers will be borrowing at least £100billion a year into the middle of the decade, with debt well above 100 per cent of GDP 

The OBR warned last week that government borrowing is set to hit £394billion this year as the economy shrinks by 11.3 per cent – the worst recession in more than 300 years

In an interview with Times Radio last night, Mr Sunak stressed that currently interest rates on government borrowing were extremely low.

‘So servicing that debt, the interest we pay on that debt is exceptionally low, which means it is affordable,’ he said.

‘But that could change, right? I think no one has a perfect crystal ball about which way interest rates and inflation will move. 

‘And obviously, we’re much more sensitive to changes in those rates. And if they moved against us, that’s problematic. 

‘So we have to keep an eye on that. And then the other thing is more generally, you know that our economy has taken a medium term hit from all of this, and that’s what throws out day-to-day borrowing out of whack.’

Mr Sunak said the announcement about the Pfizer/BioNTech vaccine could mark ‘the start of a march back’.

‘Confidence is critical, especially in an economy like ours, which – more than most other economies – is driven by consumption, the things that we go and buy and do when we’re out and about, and consumer confidence is key to that,’ he said.

‘And that’s something that, for understandable reasons, has been in not as strong supply as we would like over the past several months, and hopefully, this is the start of a march back.’

As England’s lockdown eases and non-essential shops reopen, Mr Sunak encouraged customers to return to stores.

‘People should feel reassured and know that they’re all ready to warmly welcome us back to do our Christmas shopping,’ he said.

‘Christmas is the time for it. We’ve obviously made some changes, to allow stores to open for longer to help just space things out gives countless stores every opportunity they can to get their customers in.’

The OECD said yesterday that it expects the UK to suffer one of the worst economic hits from coronavirus this year

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