Rise in debt costs could dash Budget tax cut hope

Hopes for a tax cut in the budget have been tarnished by a recent rise in government borrowing costs, which threatens to put a hole in public finances.

Chancellor Jeremy Hunt lined up for £30bn more than forecast three months ago in the autumn statement due to falling energy prices, a stronger economy and lower interest payments on debt. Such a windfall would give him room to expand support for utility bills, raise public sector wages and freeze fuel taxes.

It could also enable him to reverse a controversial corporate tax increase from 19 to 25 percent next month.

But Hunt’s hands may be tied by a recent rise in market expectations that interest rates may need to stay high longer to contain inflation.

The Office for Budget Responsibility (OBR), the fiscal watchdog, is finalizing its five-year forecasts for government borrowing costs, which will be published March 15 along with Hunt’s Budget. They will indicate that it now costs the Treasury nearly 4 percent to borrow for ten years — more than the rate used in the November OBR forecast.

Isabel Stockton, from the Institute for Fiscal Studies, said: ‘Interest payments on debt are set to peak at a whopping £120bn this year, but experts warn they could fall more slowly than expected.’ The OBR is expected to forecast a much smaller recession than feared, but also warn of a weak recovery over the next five years.