UK Chancellor May Borrow Extra £70 Billion Amid Rising Welfare and Debt Costs

London — UK Chancellor John Healey is reportedly planning to authorize an additional £70 billion in government borrowing to address escalating debt and welfare expenditures. This move is expected to be part of his upcoming budget announcement, according to financial analysts.

The budget is anticipated to be a "do no harm" package, featuring limited tax increases, particularly for banks, and measures aimed at providing cost-of-living relief for families and businesses. However, major decisions regarding defense, benefits, and social care are likely to be postponed.

Increased inflation, influenced by global events such as the conflict in Iran, and a surge in government borrowing have reduced the Chancellor's financial buffer against economic shocks to an estimated £12 billion. This figure is half the amount available to his predecessor, Rachel Reeves.

The reduced financial headroom means the Chancellor faces challenges in meeting fiscal rules that stipulate day-to-day spending must be covered by tax revenues and that debt as a proportion of annual output, or GDP, must be declining by the end of the decade. Last month, the UK's national debt surpassed £3 trillion, and inflation reached an 11-month high of 3.5 percent. The monthly debt interest payment has also hit a record high of £10.9 billion.

This situation has resulted in borrowing—the disparity between government spending and tax receipts—exceeding the Office for Budget Responsibility's (OBR) March forecast by £6 billion. Deutsche Bank's chief UK economist, Sanjay Raja, projects that this increased borrowing will add £70 billion more to the public sector net debt by 2031-32 than previously estimated by the OBR.

The OBR has faced criticism for consistently underestimating the borrowing needs of successive governments. Research from the Institute for Fiscal Studies (IFS) indicates that since the OBR's inception in 2010, Chancellors have typically aimed for borrowing around 1.1 percent of GDP five years into a forecast. However, in reality, borrowing has averaged 4.8 percent of GDP in that timeframe. The IFS also noted that debt, which the OBR projected would fall, has actually risen by an average of 15 percent of national income over the same periods.

The IFS attributes these discrepancies not only to unforeseen events like the pandemic and international conflicts but also to the abandonment or deferral of planned fiscal consolidations. The Institute cautioned that if current borrowing plans are not met, the fiscal outlook will remain a concern.

The OBR has acknowledged underestimating the impact of a significant National Insurance tax increase in 2024, which led to higher employment costs, job losses, and a downturn in business confidence and investment, particularly in labor-intensive sectors. The current Chancellor is expected to avoid similar policy missteps.

Philip Shaw, chief economist at Investec, suggested that Healey is likely to adhere to a principle of "do no harm," ruling out the equalization of capital gains and income tax while aiming to provide relief for consumers and businesses. Potential measures include removing VAT from energy bills and freezing fuel duties.

However, increased taxes on banks, which have benefited from sustained high-interest rates, and gambling firms are anticipated. Experts have also suggested that a windfall tax on oil companies cannot be entirely dismissed. Healey, who previously resigned as defense minister over unfunded spending proposals, must also secure an additional £1.2 billion annually for military equipment. This requirement is separate from broader defense spending decisions and cannot be deferred, according to Shaw.

Healey is tasked with developing a plan to increase defense spending to the NATO target of 3 percent of GDP by 2030. He is also under pressure to present credible spending plans to reassure financial markets. The IFS director, Helen Miller, warned that outlining implicit public spending cuts that the government does not intend to implement would render the budget unrealistic.