Government plans to reduce the UK’s debt mountain by restricting Whitehall spending are among the biggest risks to the outlook for the public finances, according to the Treasury’s independent forecaster.
The Office for Budget Responsibility (OBR), which predicts the impact of economic trends and government spending decisions on the public finances, said the uncertainty surrounding the government’s spending after next year and higher than expected inflation meant there was a risk that planned budget cuts to debt in five years’ time would be dashed.
“They are a very big fiscal risk,” the OBR chair, Richard Hughes, told MPs on the Treasury committee.
Jeremy Hunt said in his autumn statement last week that he would bring down the level of public sector debt as a proportion of gross domestic product (GDP) in 2028-29, in line with his own pledge to cut the level of debt to GDP in the last year of a five-year outlook for the public finances.
The Resolution Foundation thinktank described the plan as implausible because of the lack of any detailed spending plans to show how Whitehall departments would cope with the £20bn in cuts needed to achieve the debt reduction.
The director of the Institute for Fiscal Studies, Paul Johnson, told MPs that cutting debt may not be possible unless the chancellor increased fuel duty.
“The government meets, just, its target of debt falling in the last year of the forecast period, but by a tiny amount,” he said.
“To get debt falling requires petrol/diesel duty to rise in line with inflation every year, which they haven’t for 13 years. And probably more importantly, requires public service spending to be cut on things other than health and defence by about 3% a year. And then he has a commitment to freeze spending on investment.
“All are needed to achieve that very tiny fall in the debt to GDP level.”
Hughes said a rise in inflation, which increases the costs of running public services, also posed a risk to the forecast.
The Treasury committee chair, Harriett Baldwin, said she was concerned that the UK’s debt level would increase despite efforts to restrict spending.
She asked Hughes why the UK’s annual debt payments had risen to become the highest in the G7.
Hughes responded that the Treasury’s reliance on short-term loans by the Bank of England via its quantitative easing (QE) programme and inflation-linked bonds had dramatically increased the cost of borrowing over the last 18 months.
Hughes said a one percentage point increase in interest rates beyond its forecast in March added £15bn a year to government debt payments and sent the annual cost above £100bn.
Bank of England loans to the government are tied to overnight interest rates, which have soared after 14 consecutive increases to 5.25%. Index-linked bonds, which account for more than a quarter of government borrowing, have risen sharply in line with the retail prices index (RPI).
