ALEX BRUMMER: The figures are frightening… God help us if interest rates go up 

The Chancellor Rishi Sunak leaving No.11 Downing Street on his way to deliver his budget speech

ALEX BRUMMER: The figures are frightening… God help us if interest rates go up

Never in peacetime has a Chancellor of any political hue lavished sums so generously as Rishi Sunak to preserve jobs and commerce.

There is no doubt that his extensions to the furlough scheme and other support measures have already worked wonders to prevent the terrifying levels of unemployment predicted when Covid hit a year ago. And the optimism unleashed by the speed and success of the vaccine rollout has certainly put rocket burners under the economy.

But the Herculean task facing Sunak and his successors in restoring sanity to the public finances means there is no room for complacency.

Few people are more aware of this than the Chancellor himself. His plans in coming years for a savage rise in the corporation tax paid by businesses, as well as a freeze on personal tax allowances which will push millions into higher tax brackets, indicate just how concerned he is about the level of national debt.

The Chancellor Rishi Sunak leaving No.11 Downing Street on his way to deliver his budget speech

Yet even with these swingeing measures, the nation’s accumulated borrowing will still exceed the total output of the entire economy by the end of the forecast period in 2025-26.

It is a staggering burden that will have to be borne by generations to come. And it could become still more onerous if – as some leading economists expect – the era of near zero inflation and the lowest interest rates since the Bank of England was founded in the 17th century comes to an end.

Sunak’s generous package of measures in the budget to keep people in work, support the self-employed and prevent further damage to the high street and hospitality industries will alone add an extra £65billion to the total Covid bill.

This additional spending means the total bill for supporting an economy whose output has fallen by 9.9 per cent since last year now comes to a startling £407billion.

As an economic journalist who has been writing on budgets for more decades than I care to remember, I have never seen the tectonic plates of the national finances move so dramatically and on such a scale as in the latest forecasts.

   

More from Alex Brummer for the Daily Mail…

In the current fiscal year ending on April 5 2021, the government will borrow £355billion. True, that is less than the £394billion forecast in November but at 16.9 per cent of Gross Domestic Product – the total value of goods produced and services provided in a country during one year – it is still the highest level in peacetime.

In comparison, the £150billion borrowed by Gordon Brown in the year after the financial crisis looks modest. And yet bringing Labour’s borrowing binge down to acceptable levels required almost a decade of austerity and a prolonged squeeze on household incomes.

Even if the budget’s forecasts are right and growth soars by 7.3 per cent in 2022 thanks to stupendous investment tax breaks for businesses and the pent-up demand from consumers who have amassed bank deposits of up to £180billion during lockdown, the nation will still be clocking up borrowings of £234billion in the financial year 2021-22 and £106.9billion the year after that.

To put it another way, in the biggest fundraising venture in the nation’s history the UK Treasury will have to find £750billion – or three-quarters of a trillion pounds – to borrow over three years through its Debt Management Office. And then there’s the threat of higher interest rates on top of this – if rates go up by a single percentage point, it would cost an additional bill of £25billion per year, pushing the UK even deeper into debt.

Chart showing change in the receipts-to-GDP ratio relative to 2019-20

Chart showing change in the receipts-to-GDP ratio relative to 2019-20 

TODAY: The FTSE 100 index rose to 6,703 this morning before closing at 6,669 this afternoon

TODAY: The FTSE 100 index rose to 6,703 this morning before closing at 6,669 this afternoon

What is still more frightening is that the national debt – the total amount of government borrowing – does not drop below 100 per cent of GDP at any time between now and 2025-26 when it reaches an eye-watering £2.8trillion.

The Everest scale of debt explains why the Chancellor felt he had no choice but to try and restore some semblance of reality to the national accounts; more specifically why Sunak is proposing that huge increase in corporation tax from 19 per cent to 25 per cent as well as the ‘stealth’ taxes on income, pensions and capital gains.

The Office for Budget Responsibility points out that Sunak’s planned increases mean the nation’s tax burden will reach 35 per cent of gross national product by 2025-26, the highest level since the late Roy Jenkins was Labour Chancellor in the 1960s. So unpopular was that Jenkins tax burden that it is credited with ushering the Tories under Ted Heath into office in 1970.

The great irony is that these tax rises are the last thing Sunak, an ardent free marketeer, wants to introduce. Boris Johnson’s government was desperate to unlock the animal spirits of British business after we left the European Union by creating a low tax, competitive economy. That is now in abeyance.

An infinitely more pressing task is to persuade others to invest in the country and particularly in UK bonds, or ‘gilt-edged stock’, to enable the government to borrow the vast sums it needs. The key to this is restoring Britain’s reputation for stability and financial competence – thereby averting the attacks on the pound which defeated so many of Sunak’s predecessors.

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