UK debt and welfare payments bill set to soar by over £50bn

The winner of the Conservative Party leadership race will face huge additional costs in servicing the national debt and paying social security benefits due to rising inflation and interest rates , according to calculations by the Financial Times.

The estimates, which are an update of the Bank of England’s previous official inflation forecast in March, show the UK’s debt and social payments bill will rise by more than £50bn l ‘next year.

The results predict that debt servicing costs are set to nearly double next year, from £50bn to £95bn, as £500bn of UK government debt is tied to the consumer price index.

This bill is falling as inflation falls, but is being replaced by higher social security benefits, which are also price-linked, and are set to rise by £23billion each year when the next election comes around.

The payments will leave the new Tory leader hopeful that tax revenues will remain strong, helped by high inflation, at a time when the BoE thinks the economy will slide into recession.

In March, the Office for Budget Responsibility said ministers would stick to their own fiscal rules with £30bn of room to maneuver in 2024-25. But officials close to the Treasury and the OBR say tougher forecasts will be unveiled by the fiscal watchdog when the new prime minister takes office.

So far in the leadership campaign, both candidates have based their tax and spending decisions on the March forecast, disregarding the sharp deterioration in growth and rising inflation and interest rates. ‘interest.

Britain’s economy shrank 0.1% in the second quarter, reflecting the cost of living crisis that is beginning to affect households across the country.

Paul Johnson, director of the Institute for Fiscal Studies, said that with inflation pushing up the costs of social protection and interest, “the new Prime Minister will face a rather difficult public finance situation”.

The figures would be an understatement of the public finance problem for Rishi Sunak or Liz Truss if Goldman Sachs’ latest inflation forecast comes true. The investment bank said on Friday that following the latest energy bill estimates, CPI inflation is expected to peak at 14.4% in early 2023.

Dire public finances will also be problematic for Sunak’s team as they undermine his campaign’s shift from stressful struggles with the nation’s debt to promising future tax cuts.

Professor Charlie Bean, a former OBR committee member, said pressures on public finances meant the permanent tax cuts promised by Truss were “irresponsible”.

“It’s reasonable to run a large temporary deficit right now,” he said. “We’ve had a shock, which we hope will be temporary, but Liz Truss is thinking about permanent reductions in the tax burden and the question remains whether the £30bn margin is still there.”

Some economists close to the Truss campaign believe borrowing more to cut taxes is necessary and is the best policy at a difficult time for the UK economy.

Tim Pitt, a former adviser to Philip Hammond when he was Chancellor, said that with public services under severe pressure, “the new Chancellor will take a brutal shock this autumn as he tries to keep public finances on a sustainable way”.

Julian Jessop, an independent economist, said people shouldn’t worry about more borrowing as long as debt remains under control over the medium term. “I’m less worried if the wiggle room disappears in the face of fiscal targets that don’t make much sense,” he said.

Labour’s shadow chancellor Rachel Reeves said high inflation needed “real action”.

“That’s why the government must close the gaps in the windfall tax on oil and gas producers, who are making record profits, to fund better cost-of-living support for the country,” he said. she adds.