Chancellor set for extra £70bn borrowing binge as welfare and debt costs rise

The Chancellor will unveil plans to borrow an extra £70billion to pay for higher debt and welfare costs in his first Budget on Wednesday, City experts say.

John Healey is expected to deliver a ‘do no harm’ package of limited tax hikes for banks, and cost-of-living support for families and firms, while delaying big spending decisions on defence, benefits and social care.

Higher inflation caused by the Iran war and a surge in Government borrowing mean Healey’s buffer against economic shocks is £12billion – half that left by his predecessor Rachel Reeves.

It means he has little ‘headroom’ to meet his fiscal rules – that day-to-day spending should be paid for from tax receipts, and debt as a proportion of annual output, or GDP, is falling by the end of the decade.

Last month, the UK’s debt pile topped £3trillion and inflation hit an 11-month high of 3.5 per cent. The monthly debt interest bill of £10.9billion is the highest ever.

That left borrowing – the difference between what the Government spends on services and raises in tax – £6billion higher than forecast by the Office for Budget Responsibility (OBR) in March.

The higher borrowing will add £70billion more to public sector net debt than previously forecast by the spending watchdog by 2031-32, according to Sanjay Raja, chief UK economist at Deutsche Bank.

The OBR has come under fire for consistently underestimating how much successive governments have needed to borrow to balance the books.

Since the official forecaster was set up in 2010, chancellors have on average aimed to borrow 1.1 per cent of GDP in the fifth year of the forecast, the influential Institute for Fiscal Studies think-tank found.

‘But when that year arrived, the average for borrowing has been 4.8 per cent of GDP,’ it added. 

‘In every single one of the 33 forecasts the OBR has produced, debt was projected to fall by the end of the five-year forecast. Instead, it has risen by an average of 15 per cent of national income over that same period.’

The IFS blames this poor track record not just on ‘adverse shocks’ such as the pandemic and wars in Ukraine and Iran, but because ‘planned fiscal consolidations have also been abandoned or pushed back’. 

The IFS added: ‘If the Government does not deliver the fall in borrowing in its current plans, the picture will remain concerning.’

The OBR admits to underestimating the hit to growth from Reeves’ £25billion National Insurance tax raid in 2024.

The surprise move increased employment costs, leading to job losses and hiring freezes, especially in labour-intensive sectors such as retail, hospitality and leisure and clobbered business confidence and investment. The Chancellor is expected to avoid repeating that policy error.

‘We expect Healey to follow the finance ministers’ equivalent of the Hippocratic oath, namely “do no harm”,’ said Philip Shaw, chief economist at investment bank Investec.

Healey has ruled out equalising capital gains and income tax while vowing to give consumers and businesses ‘breathing space’.

Measures flagged include removing VAT from energy bills and freezing duty on petrol and diesel prices.

However, higher taxes on banks, which have gained from higher-for-longer interest rates, and gambling firms are expected, while experts say a windfall tax on oil companies could not be ruled out either.

Healey, who resigned this summer as defence minister over unfunded spending plans, also has to find an extra £1.2billion a year for military equipment.

‘This is a can that cannot be kicked down the road and is separate to any extra defence expenditure that may be decided on,’ Shaw said, referring to next year’s spending review.

Healey has yet to come up with a plan of how defence spending will reach its Nato target of 3 per cent of GDP by 2030.

He is also under pressure to come up with credible spending plans to reassure the jittery bond markets that lend money to the Government.

Outlining implicit cuts in public spending that the Chancellor had no intention of delivering ‘would make the Budget a work of fiction,’ said IFS director Helen Miller.

The IFS said: ‘What will ultimately matter for the public finances is not whether Healey meets the fiscal rules by pencilling in a fall in borrowing, but whether he goes on to deliver it.’

The Treasury and the OBR declined to comment.