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The UK chancellor has warned of “difficult decisions” on the public finances in his forthcoming Autumn Statement, with no scope for immediate tax cuts as the country faces higher interest payments on its national debt and confronts myriad geopolitical risks.
Jeremy Hunt said on Friday the UK faced a worse financial outlook than in the spring, as rising interest rates lead to a “repricing” of long-term debt. Underscoring the challenges, Andrew Bailey, the Bank of England governor, also said on Friday the last mile in getting inflation back to target would be the “hardest” and require monetary policy staying restrictive.
Both officials were speaking on the sidelines of IMF and World Bank meetings in Morocco.
Hunt’s warning points to a tough Autumn Statement on November 22 that will focus on finding efficiencies in the public sector while seeking to bolster growth.
He was speaking days after the IMF set out a gloomy forecast for the UK, predicting higher inflation than other G7 countries and economic growth of 0.5 per cent this year and 0.6 per cent next.
The fund has implored big economies to bear down on their deficits amid higher inflation and interest rates, warning that government debts around the world will grow “considerably faster” than pre-pandemic projections as interest payment costs rise.
“Interest rate projections for all economies have gone up,” Hunt told reporters on Friday morning. “The UK is not immune to those changes.”
The UK, he added, is likely to see an increase in its debt payments for this fiscal year of between £20bn and £30bn compared with previous forecasts, describing this as a “huge change”. The chancellor reiterated his warnings earlier this month at the Conservative party conference that there were “no shortcuts” to lower taxes, despite calls from the right of his party for reductions.
The Autumn Statement, the chancellor said, would set out a “credible path” to more efficient public services, as he vowed to boost public sector productivity. It would also lay out a plan for escaping the low-growth trap that all western economies have become stuck in, the chancellor added, saying this was about “supply side reforms”.
He signalled the UK would not change its fiscal rules, which require the public debt ratio to be falling by the fifth year of the government forecast. “Any chancellor has to give the markets confidence that we will follow the disciplines necessary to contain and bring down national debt over the medium to longer term,” he said.
Speaking separately Bailey warned that future monetary policy decisions would remain “tight” after the Bank of England held rates unchanged at its latest meeting.
The governor acknowledged there had been “solid progress” in recent months in terms of price pressures easing as monetary policy had begun to curtail demand. But he made clear that it was too soon to declare victory in the fight against inflation.
“Let’s not get carried away, there is an awful lot still to do”, he said. Getting inflation down to the 2 per cent target “really does lean heavily on that restrictive policy”. As of August, it hovered at an annual rate of 6.7 per cent.
Bailey’s comments offer the latest signal that the BoE’s policy rate is at or near its peak after the monetary committee opted to forgo further tightening in September and keep its benchmark rate at 5.25 per cent.
Last month, policymakers were split 5-4, with the minority in favour of an interest rate increase. Bailey described the decision as a “tight one”.
BoE chief economist Huw Pill suggested on Thursday in Marrakech that future decisions on interest rates will be “more finely balanced” amid evidence that the central bank’s aggressive campaign to tame inflation was beginning to affect the economy more notably and further dampen already-subdued growth.
Gross domestic product rose 0.2 per cent between July and August following a 0.6 contraction the previous month, data from the Office for National Statistics showed on Thursday. Bailey on Friday said he expects the growth outlook to be “very subdued” and could deteriorate further if the BoE does not get a firm grip on inflation.