Autumn Budget 2021: The challenges facing the Chancellor
skip to Main Content
Office closures - Our teams have worked exceptionally hard during the pandemic, so we are giving everyone an extra day’s holiday as a thank you. On Friday 23 July our offices will be closed and we will be offline.

Autumn Budget 2021 – the challenges facing the Chancellor

Government debt levels

Rishi Sunak has a tough job ahead in next week’s Budget. Last Thursday’s FT reported that “Chancellor Rishi Sunak has been handed a boost ahead of next week’s Budget, with UK public borrowing falling by more than expected in September,” Whilst this is encouraging, dig a little deeper and some points of note are:

  • The fall is compared to the Office for Budget Responsibilities (OBR) forecast in the March Budget. We already know that the economic recovery has been stronger than expected back in March
  • The amount borrowed for the first six months of the year are still a staggering £108bn
  • The interest on the debt for September was £4.8bn compared to £3.2bn forecast by the OBR in March

This last point is worthy of more consideration. The interest bill in September was £1.6bn higher than forecast. For 12 months that is over £19bn! By way of comparison, the National Insurance and Social Care Levy announced last month is due to raise £12bn a year.

Debt servicing costs

In his March Budget, Rishi Sunak said: “While our borrowing costs are affordable right now, interest rates and inflation may not stay low for ever; and just a 1% increase in both would cost us over £25 billion.”

So, the key issue is debt servicing costs. If inflation and base rates increase, then a material hole opens up in the nation’s finances.

As readers of this blog are likely to be well aware, debt servicing costs are a function of both the level of debt and the rate of interest charged. The rate charged is a function of global economic circumstances and the attractiveness of the debt.

Quantitative easing and inflation

Much is made of the current level of UK Government debt and the amount borrowed during the pandemic, but the headline figures are misleading. Whilst the national debt is £2,200bn (96% of GDP), £900bn of this is owned by the Bank of England and so is effectively ‘intra-group’ debt. It has been created by printing money and half of it has been created since March 2020.

The House of Lords report: https://publications.parliament.uk/pa/ld5802/ldselect/ldeconaf/42/4202.htm acknowledged that there is a perception that the £450bn of quantitative easing (QE) was structured to finance the government so that effectively it has not had to borrow any money since February 2020.

The UK is not alone in pursuing a policy of QE. A definition of inflation is “too much money chasing too few goods”, given the supply shortages, increasing the money supply was always likely to result in inflation. Whether that inflation persists or falls back, is a key question for the government’s finances, as currently about a quarter of the debt is retail price inflation (RPI) linked.

Debt re-financing

Even where debt is not RPI linked, the government has annual re-financing of existing debt of around £100bn per year for the rest of this decade. If the QE tap is turned off, then we need to borrow in the international market and will have to pay a market interest rate on the debt.

The difficulties here are that other countries will also be borrowing and the investment purchases by China may now be cease if the Chinese government has to inject substantial funds to re-capitalise its banking sector. The demographics of the aging baby boomers in the West are also probably unfavourable. It has to be expected when this debt is re-financed that the interest rates will be higher on that new debt.

What does that mean for the forthcoming Budget?

In his last Budget speech, Rishi Sunak highlighted the importance of the inflation and interest rate outlook for the nation’s finances. I’m sure that those continue to be the dominant concerns for the forthcoming Budget. Compared to the last decade, over the coming years, we are likely to have higher interest rates, higher inflation, and a higher tax burden for the same, or most likely a declining, level of government services. A tighter monetary, economic and fiscal environment all points to a higher level of business failures.

Against this backdrop, Rishi Sunak needs to tread very carefully. Short term political giveaways could turn out to be much more costly in the long run. Despite the inevitable monetary and economic tightening, there can be no fiscal loosening. The Budget needs to be fiscally neutral and that is likely to be the case for some years to come.

PKF Francis Clark 

We will be busy on Budget day, Wednesday 27 October, analysing the Budget announcements and what they mean for our clients. We have a dedicated Budget Hub page that will start to fill with great content from about 3pm. Please bookmark our page https://www.pkf-francisclark.co.uk/budget-analysis/ and take a look.

On Thursday 28 October I will be discussing the outcomes of the Budget and what the implications may be in a free to attend webinar – you can sign up here:  https://www.bigmarker.com/pkf-francis-clark/Autumn-2021-Budget-post-Budget-conversation-with-John-Endacott

FEATURING: John Endacott
John is the firm’s head of tax. He provides high level tax advice combined with commercial acumen in terms of managing and advising on personal… read more
Back To Top