UK economic headwinds cast shadow over Sunak’s cost of living support package

A slowing UK economy will heap more pressure on the country’s finances, casting doubt over the scale of support chancellor Rishi Sunak will launch to help households through the cost of living crunch.

That’s according to economists’ assessments of fresh borrowing figures published today by the Office for National Statistics (ONS).

A combination of rising inflation, higher interest rates and weaker growth will squeeze the government’s fiscal position this year.

“Higher inflation, higher interest rates and weaker GDP growth will prevent a big [borrowing] undershoot and will erode some of the £27bn (one per cent of GDP) of headroom the chancellor had against his main fiscal mandate in March’s spring statement,” Paul Dales, chief UK economist at Capital Economics, said.

“This outlook helps to explain why the Treasury is trying to manage expectations of the scale of further fiscal support that Mr. Sunak likely will provide in the autumn,” Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said.

Debt interest payments are forecast to top £80bn over the next 12 months, driven by prices accelerating rapidly.

A large proportion of the UK’s stock of debt is linked to an old measure of inflation – the retail price index, which has reached historic highs – meaning payments to holders of government debt jump in line with price rises.

Although the government books the cost of this upgrade now, payments will actually be spread over decades.

Households are expected to cut spending in response to the worst fall in their living standards since the 1950s, which will hit the government’s tax revenues.

Tax receipts in April came in a little over £2bn lower than the Office for Budget Responsibility had expected, despite the 1.25 percentage point national insurance hike landing in the month.

However, the government borrowed less than the Office for Budget Responsibility expected last month, reaching £18.6bn, indicating Sunak is already on track to undershoot the organisation’s projected £99bn borrowing print for this year.

The ONS downgraded last year’s borrowing total to around £144bn from nearly £152bn, driven by tax revenues coming higher than thought as consumers powered the Covid-19 recovery.

Tombs added he expects the chancellor to upgrade benefits and the warm homes discount in a bid to narrow the Conservative polling deficit against Labour.

The government borrowed billions of pounds to fund measures, such as the furlough scheme, to support businesses and households through the Covid-19 crisis.

Although this shielded the economy, it has ballooned the UK’s debt stock. The ONS said the country’s stock of debt is around 96 per cent size of the economy.

“We must take a balanced and responsible approach to support people now, while also not burdening future generations,” Sunak said.

The government should ease the tax burden to prevent the UK tipping into a recession, others urged.

Julian Jessop, economics fellow at the free-market think tank the Institute of Economic Affairs, said policy should “still focus on measures to support economic growth, including easing the tax burden. A recession would have far bigger fiscal costs. A bit more imagination now should therefore pay dividends in the long run.”