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Tax rises to pay for 60% of UK deficit reduction, OBR says

Economic IndicatorsMar 08, 2021 01:25PM ET
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© Reuters. FILE PHOTO: Rishi Sunak hosts a press conference in Downing Street

By David Milliken

LONDON (Reuters) - Finance minister Rishi Sunak aims to balance Britain's public finances by relying 60% on tax rises and 40% on spending cuts, a sharp reversal of the government's approach after the 2008-09 recession, the country's budget watchdog said on Monday.

Sunak's budget plans last week showed Britain's budget deficit falling to 4% of gross domestic product in 2023/24 from a peacetime high of 19% of GDP in 2020/21, when borrowing paid for most of the financial cost of the COVID-19 pandemic.

"If you look at the ratio of this budget's consolidation to what's been done in the past, it's about 60% being done by tax and about 40% being done through spending," Office for Budget Responsibility (OBR) chairman Richard Hughes told parliament's Treasury Committee.

"The last time you had a chancellor about to deliver a big consolidation, which was in 2010, a lot more was being done through public spending and less was being done through tax," Hughes added.

Former finance minister George Osborne aimed for tax rises to account for just 20% of medium-term deficit reduction in his 2010 budget, with 80% of the work to be done by spending cuts.

Subsequent tax cuts led to spending reduction doing even more of the work, Hughes added.

Under the OBR's forecasts, tax revenues as a share of GDP are forecast to rise to 35% of GDP by 2025/26, the highest level since the 1960s.

Last week the OBR also warned that government spending on debt interest was highly sensitive to any further rise in interest rates.

Benchmark 10-year government bond yields had jumped to a one-year high of 0.8% by the time of the budget, up from 0.3% at the start of February, as part of a global surge in bond yields driven by expectations of faster growth and inflation.

Charlie Bean, a former Bank of England deputy governor who now sits on the OBR's board, said he was comfortable with the OBR's main forecast that interest rates would not rise much further.

"What I would not do is extrapolate from the recent couple of weeks to say: 'That is a trend that is going to continue, we will see markedly higher interest rates in the second half of this year'," Bean said.

The exact impact of higher interest rates on the public finances also depended heavily on whether they were accompanied by higher growth and inflation, which would boost tax revenues, he added.

Tax rises to pay for 60% of UK deficit reduction, OBR says

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Ola Mai
Ola Mai Mar 08, 2021 2:00PM ET
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