economists today warned that another round of hefty tax increases in the spring budget “cannot be discounted” as government borrowing rose to £13.5bn in October.
The latest increase – up from £9.2 billion last year – pushed total government debt to £2.46 trillion. It represents 97.5% of GDP, the highest ratio since debt levels fell from the height of World War II in March 1963.
October data from the Office for National Statistics (ONS) underscores the magnitude of the task facing Chancellor Jeremy Hunt in getting public finances back on track after the shocks of the pandemic and energy spike.
In last week’s autumn statement, he announced £24bn in tax increases over five years, including a freeze on income tax thresholds that will hit London’s middle earners.
Alison Ring Director Public Sector and Taxation at the Institute of Chartered Accountants in England and Wales, said: “The cost of the energy price guarantee and higher interest costs were the main drivers behind the increase in the deficit, which amounted to £13.5bn payments from the Bank of England to HM Treasury for quantitative easing are reversed for the first time. Public sector net debt reached £2,460 billion, on track to meet the OBR’s latest forecast of £2,571 billion by the end of this financial year.
“Last week’s autumn statement highlighted how constrained the Chancellor is by the accumulation of debt, which has led him to compound the economic woes the country faces by cutting public investment over the next five years. The government is short of money and the potential for further tax increases in the spring budget should not be discounted.”
However, the gilts market took the lending numbers well, with the yield on the benchmark UK government bond barely changing at 3.184%.
But economists pointed to a new trend that could put even more strain on public finances in the coming months as the Treasury began paying interest to the Bank of England on government debt held by the Bank as a result of the Quantitative Easing scheme introduced. was introduced instead during the Fantasy Crisis.
Laith Khalaf, head of investment analysis at brokers AJ Bell, said: “Former Chancellor George Osborne always insisted that the Treasury fix the roof when the sun was shining, using economic benefits to balance the Treasury. Unfortunately, the last five years have been a long, dark, cloudy day in the UK economy. Weak growth and pandemic spending have left government finances in tatters and, to add insult to injury, the Treasury is now starting to pay the Bank of England for the QE scheme.
“That’s because the Treasury pays a base interest rate on Bank of England government debt, and for the first time since the scheme was launched in 2009, it is now higher than the interest coupons on that debt. In addition, the Bank of England will also demand payment for the losses it incurs if it winds down its QE scheme and sells Gilts below the price it bought them for. This resulted in a net payment from the Treasury to the Bank of England of £0.8 billion in October, according to the ONS.
“This is the thin end of the wedge as the OBR estimates £133bn of cash will be transferred from the Treasury to the Bank of England over the next 5 years to cover the QE scheme, representing 2.1% of adds GDP to the government. debt by 2028.”