The Times - UK (2022-01-26)

38 Wednesday January 26 2022 | the times

Business

Rising inflation caused interest pay-
ments on government debt to treble in
only a year to reach record levels for
December, official statistics show.
The government paid £8.1 billion in
interest in December, 200 per cent
higher than the £2.7 billion bill in the
previous year, according to estimates
from the Office for National Statistics.
The increase is largely because of a rise
in the retail prices index, which deter-
mines payouts on index-linked gilts.
The net level of borrowing was
£16.8 billion, below the £18.5 billion
that had been forecast by economists
and broadly in line with projections of
£16.7 billion from the Office for Budget
Responsibility. Nevertheless, it was the
fourth highest level of December bor-
rowing on record after the first year of
the pandemic in 2020 and the after-

Interesting times

50

40

30

20

10

0

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£bn

2019 2020 2021

Monthly borrowing

DJ FMAM J J A S ONDJ FMAM J J A S OND

The International Monetary Fund has
cut forecasts for economic growth in
Britain and around the world because
of disrupted supply chains and the
impact of pandemic restrictions.
Global growth forecasts for 2022
have been revised down by 0.5 percent-
age points to 4.4 per cent since the last
review in October in the face of an
anticipated rise in American interest
rates and slowing consumer demand in
China.
The fund also revised down its pre-
dictions for UK growth by 0.3 percent-
age points to 4.7 per cent. Analysts said
that growth would be hit by restrictions
to curb the Omicron coronavirus
variant, as well as by supply shortages,
particularly in the labour and energy

and 0.8 percentage points to 4 per cent

and 4.8 per cent, respectively. Inflation

is set to remain high throughout the

year, averaging 3.9 per cent in advanced

economies and 5.9 per cent in emerging

economies.

The IMF’s researchers said the rapid

increase in fuel prices was expected to

“moderate during 2022-23, which will

help to contain headline inflation”.

Higher inflation should fade as supply

chain disruptions eased, monetary

policy was tightened and demand shift-

ed back from goods towards services,

math of the financial crisis in 2009 and

2010.

Rishi Sunak, the chancellor, said:

“Risks to the public finances, including

from inflation, make it even more im-

portant that we avoid burdening future

generations with high debt repay-

ments. Our fiscal rules mean we will re-

duce our debt burden while continuing

to invest in the future of the UK.”

Public sector debt, excluding bailouts

for banks, was £2.34 trillion at the end of

December, or 96 per cent of GDP.

However, strong growth in tax

receipts continues to keep public sector

net borrowing — the difference

between what the government spends

and what it receives in taxes — in line

with the OBR’s projections. Tax

receipts of £68.5 billion were well above

the £64.3 billion predicted by the fore-

caster. Borrowing from April to

December last year was £146.8 billion,

8.1 per cent below the level expected by

the OBR because of a strong bounce-

back in the labour market after the end

of the furlough scheme.

This gives Sunak enough headroom

to set out a plan to deal with the rising

cost of living, according to James Smith,

research director at the Resolution

Foundation, the think tank. “With

soaring energy bills set to push around

six million families into fuel stress, a

targeted package to limit the rise in

energy bills is the top priority, with the

majority of gains from a delayed

national insurance increase going to

the richest fifth of households,” he said.

Martin Beck, chief economic adviser

to the EY Item Club, the forecasting

body, expects borrowing to be below

the OBR’s forecast of £183 billion by the

end of the fiscal year in April, although

this would be “influenced by what, if

any, measures the government ann-

ounces to take the pressure off house-

holds’ finances from rising energy

bills”. The Bank of England’s monetary

policy committee will meet next week

to decide what steps to take after it

increased interest rates for the first

time since 2018 in its December meet-

ing. Inflation measured 5.4 per cent in

December, the highest level in nearly

30 years.

Samuel Tombs, chief UK economist

at the Pantheon Macroeconomics

consultancy, predicted that the chan-

cellor would take action to limit the

impact of rises in energy prices before

April. “Looking ahead, interest pay-

ments almost certainly will top the

OBR’s budget forecast again in 2022-23;

our RPI inflation forecast currently

points to a £6 billion overshoot,” he

said.

“Despite this, Mr Sunak probably still

will intervene in the spring statement

on March 23, if not sooner, to alleviate

the “cost of living crisis” set to engulf

households in April.”

Interest bill on government debt

soars as inflation takes heavy toll

Arthi Nachiappan
Economics Correspondent

markets, that are expected to intensify

this year. Growth is tipped to slow fur-

ther next year to 2.3 per cent.

The IMF was set up in the aftermath

of the Great Depression to oversee

monetary stability across the world. It

has 190 members. In its World Eco-

nomic Outlook, it said the global eco-

nomy had entered the year “in a weaker

position than previously expected...

Rising energy prices and supply disrup-

tions have resulted in higher and more

broad-based inflation than anticipated,

notably in the US and many emerging

markets and developing economies.

The retrenchment of China’s real estate

sector and slower-than-expected

recovery of private consumption have

also limited growth prospects.”

Forecasts for the US and China were

revised down by 1.2 percentage points

they said. During the pandemic, many

people switched to buying goods over

services. Purchases of goods were

brought forward while consumers

spent savings accumulated during

months of lockdown.

Gita Gopinath, first deputy manag-

ing director of the IMF, said the impact

of Omicron would begin to fade in the

second quarter of this year, but other

challenges were likely to persist.

“In the case of the US, [the down-

grade] reflects lower prospects of legis-

lating the Build Back Better fiscal pack-

age, an earlier withdrawal of extraordi-

nary monetary accommodation, and

continued supply disruptions,” she said.

Build Back Better is the set of measures

announced by President Biden to fund

Covid relief, social services and welfare

to aid recovery in America.

Growth forecasts hit by supply chain and Covid pressures

Arthi Nachiappan How Britain compares

2020 estimate 2021 estimate 2022 projection 2023 projection

Economic outlook for big economies

10%

5

0

-5

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UK US Germany France Japan China India Source: IMF

Chancellor

has choices

Analysis

T

he chancellor is under

pressure to set out a

plan to tackle the

looming crisis in the

cost of living (Arthi

Nachiappan writes).

With the latest data showing

that borrowing for the first nine

months of the financial year is

£13 billion lower than the Office

for Budget Responsibility’s

October forecast, it is clear that

Rishi Sunak’s hands are not tied.

Taxpayers will be hit by both a

rise in national insurance

contributions and a 50 per cent

increase in energy prices after

the lifting of the energy price cap

on April 1. An increase in

business costs from higher

minimum wages on the same day

is also likely to be transferred to

consumers through prices.

Economists are divided over

whether Sunak will choose to

delay the rise in national

insurance or to tackle the rise in

Ofgem’s cap on energy prices.

For Hoa Duong, at PwC, “all eyes

are on national insurance

contributions” to pull the

recovery back to pre-pandemic

levels. “Accounting for 20 per

cent of the government receipts

in December, increasing national

insurance would potentially be a

quick fix.”

She added: “We anticipate that

the question is not ‘if ’ but ‘when’

national insurance will rise —

with the challenge being to time

any increase without further

squeezing household budgets and

impacting economic growth.”

It is more likely that the

Treasury will move to stop the

energy price rise, according to

Samuel Tombs, at Pantheon

Macroeconomics. “We doubt,

however, that the chancellor will

defer the introduction of the

increase in national insurance

contributions in April, at an

annual cost of £12.7 billion, as it

is best politically to get large tax

rises out of the way well before

the next election, which likely

will be held in May 2024,” he

said.

Bethany Beckett, at Capital

Economics, said that the

chancellor would have enough

fiscal room to cancel the

scheduled increase in national

insurance payments.