Sunak warned against drastic action as borrowing soars

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Tom Rees
·3 min read
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Rishi Sunak in the Commons
Rishi Sunak in the Commons

Britain’s Covid bill climbed by a further £34bn during a record-breaking December, stoking fears the Chancellor will use the Budget in March to raise taxes to shore up the public finances.

Another wave of economic support pushed up government borrowing in the first nine months of the financial year to a record £271bn as winter Covid restrictions hit the battered public finances.

Borrowing in December marked the biggest widening of the deficit since May and was the third-highest for any month on record, the Office for National Statistics said. Public debt remained at its highest level since the early 1960s at 99pc of GDP, or £2.1 trillion.

Rishi Sunak said the borrowing binge was the “fiscally responsible thing to do” but cautioned that "we should look to return the public finances to a more sustainable footing" once the recovery begins. The Chancellor has reportedly warned Tory MPs of spending restraints in the run-up to the Budget as speculation over tax hikes mounts.

Economists said the latest surge in the deficit put UK borrowing on track to reach almost £400bn in the current financial year. The deficit is currently £213bn higher than the same period last year.

The sharp rise in borrowing was driven by spending rising by 44pc compared to the same month in 2019. Government revenue fell by just 1.2pc as tax receipts sink.

Samuel Tombs, Pantheon Macro economist, said borrowing would plunge from around 20pc of GDP this year to below 10pc if government income support schemes ends in the spring and health spending declines.

“We doubt that the Chancellor will go a step further in the Budget on March 3 and push through large immediate tax rises or non-health spending cuts. But the Treasury will not tolerate a 10pc deficit indefinitely.”

There are fears that Mr Sunak will slam the brakes on spending too soon and set back the economy’s recovery.

“The danger is that fiscal policy is tightened too soon to fill a perceived hole in the public finances caused by the crisis that never materialises,” said Thomas Pugh, UK economist at Capital Economics.

“The Chancellor should resist the urge to try to reduce the budget deficit at the next Budget on March 3 and instead focus on continuing to support those areas of the economy that need it.”

Economic Intelligence newsletter SUBSCRIBER (article)
Economic Intelligence newsletter SUBSCRIBER (article)

Philip Shaw, economist at Investec, said the Chancellor would “attempt to strike a balance between maintaining fiscal credibility and providing continued support to the economy”.

It came as the Office for Budget Responsibility admitted the pandemic will mean it has made the “largest official economic forecast errors ever”. In its annual Forecast Evaluation Report for the financial year 2019-20, the budget watchdog said its forecasts were blown off course in the final few weeks by Covid.

“The effects of the pandemic will also mean that our forecast errors for the current and next few years will be larger than ever,” it said.