Rachel Reeves set for fresh tax raid or spending cuts as Iran war bites | UK | News
Economists are warning that Chancellor Rachel Reeves will come under pressure to raise taxes or cut spending after borrowing costs soared to their highest level since the 2008 financial crisis on Friday. Dismal borrowing figures have boosted gilt sales amid concerns about rising inflation and rising interest rates.
It comes after official figures showed government borrowing last month unexpectedly jumped to the second-highest February level since records began; This raised concerns about a looming crisis in public finances and rising inflation due to the Iran war. US-Israeli attacks on Iran late last month triggered Tehran’s retaliation against US bases in the Gulf. They also closed the Strait of Hormuz, a vital trade route, causing economic shocks around the world.
The Bank of England kept interest rates steady on Thursday and warned of sharply higher inflation, raising the prospect of possible interest rate hikes if the war and energy price shock lasts longer.
This had caused gold yields to rise further, with the latest public finance statistics adding to the woes and causing borrowing costs to soar, adding to Ms Reeves’ headache.
The Office for National Statistics (ONS) said public sector borrowing stood at £14.3bn in February, £2.2bn higher than a year ago and almost double the £7.4bn forecast by Britain’s financial watchdog, the Office for Budget Responsibility (OBR), in November last year.
It defied expectations for a decline, with most economists expecting £8.8bn of borrowings for February.
Borrowing for the 11 months of the financial year to March has so far stood at £125.9bn; This was £11.9bn lower than the same period the previous year and £1.9bn below the OBR’s November forecast of £127.8bn.
Experts have warned that rising returns would leave Ms Reeves with little firepower to protect her household from the looming war-induced energy bill shock.
Elliott Jordan-Doak, senior UK economist at Pantheon Macroeconomics, said: “If sustained at current levels, we estimate that increases in gilt yields will reduce the Chancellor’s share by £7.1bn in 2030/31.”
“Unless hostilities end quickly and energy prices fall, the Chancellor will again have to make difficult decisions in the autumn budget,” he warned.
Martin Beck, chief economist at WPI Strategy, said: Telegram: “The risk is that an energy shock, even if it is not long-lasting, could leave the UK facing higher headline inflation, higher interest rates, weaker real incomes, lower investment and a smaller economy and tax base by 2029-30.
“If this happens, the Chancellor may subsequently need tax increases or spending curbs to restore compliance with fiscal rules.”
Former Institute for Fiscal Studies (IFS) director Paul Johnson said the Treasury may need to be “flexible” in its fiscal rules to avoid tax rises because “this is the sort of situation where you might not want to raise taxes or cut spending to keep borrowing down”.
Treasury Under Secretary James Murray said: “We are better prepared for a more unstable world because of the choices we made before the conflict in the Middle East began.
“We have doubled our headroom and borrowing was forecast to be below the G7 average.”
