John Healey will announce plans to borrow an additional £70 billion to pay for higher debt and welfare costs when he delivers his first Budget on Wednesday, according to City experts. The extra borrowing will add £70 billion more to public sector net debt than previously forecast by the Office for Budget Responsibility by 2031-32, Sanjay Raja, chief UK economist at Deutsche Bank, said. Healey's fiscal buffer against economic shocks has shrunk to £12 billion, half the level left by his predecessor Rachel Reeves, as higher inflation caused by the Iran war and increased Government borrowing have tightened the Government's room for manoeuvre.
The Chancellor faces mounting pressure on the public finances. Last month, the UK's debt pile topped £3 trillion and inflation hit an 11-month high of 3.5 per cent. The monthly debt interest bill of £10.9 billion is the highest ever recorded. Borrowing was £6 billion higher than forecast by the Office for Budget Responsibility in March. These figures mean Healey has little headroom to meet his fiscal rules, which require day-to-day spending to be paid for from tax receipts and debt as a proportion of GDP to be falling by the end of the decade.
The Office for Budget Responsibility has faced criticism over its forecasting track record. Since the official forecaster was set up in 2010, the influential Institute for Fiscal Studies think-tank found that chancellors have on average aimed to borrow 1.1 per cent of GDP in the fifth year of the forecast. However, when that year arrived, the average for borrowing has been 4.8 per cent of GDP. In every single one of the 33 forecasts the OBR has produced, debt was projected to fall by the end of the five-year forecast, yet it has risen by an average of 15 per cent of national income over that same period. The IFS blamed this not just on adverse shocks such as the pandemic and wars in Ukraine and Iran, but because planned fiscal consolidations have been abandoned or pushed back.
Healey is expected to deliver a 'do no harm' package of limited tax hikes for banks and gambling firms, along with cost-of-living support for families and firms, while delaying big spending decisions on defence, benefits and social care. Measures flagged include removing VAT from energy bills and freezing duty on petrol and diesel prices. Philip Shaw, chief economist at investment bank Investec, said he expects Healey to follow the finance ministers' equivalent of the Hippocratic oath. Healey has ruled out equalising capital gains and income tax while vowing to give consumers and businesses 'breathing space'. He also faces pressure to find an extra £1.2 billion a year for military equipment and must reassure bond markets about the Government's finances.
The IFS warned that what ultimately matters is not whether Healey meets the fiscal rules by pencilling in a fall in borrowing, but whether he goes on to deliver it. IFS director Helen Miller said outlining implicit cuts in public spending that the Chancellor had no intention of delivering would make the Budget a work of fiction. Healey has yet to come up with a plan for how defence spending will reach its Nato target of 3 per cent of GDP by 2030.
For savers and borrowers, higher government borrowing and debt could put pressure on interest rates and the value of savings, while businesses face decisions about whether to invest or hire given the uncertain fiscal environment.