Families may face double blow of tax rises and dearer loans

TAXES and the cost of borrowing could both rise by more than expected in a ‘double whammy’ to household budgets, experts said yesterday.

Interest rates could go up far sooner than anticipated, hiking the cost of mortgages and other loans for millions of households after years of ultra-cheap money, according to a report from Capital Economics.

Analysts said higher rates would drive up the cost of servicing the national debt, forcing George Osborne to raise taxes to plug the hole in his budget.

The warning to families benefiting from a rise in wages during the economic recovery was another setback for the Chancellor after last week’s Autumn Statement.

He has already been accused by the Institute for Fiscal Studies of gambling with the economy by basing his plans on ‘lucky’ upgrades to official forecasts from the Office for Budget Responsibility (OBR).

Paul Hollingsworth, UK economist at Capital Economics, said if the forecasts prove too optimistic families could be hit by rising interest rates and higher taxes.

Mark Littlewood, director general at the Institute of Economic Affairs, called Mr Osborne a ‘hostage to fortune .The Chancellor’s plans rest on the OBR’s growth figures being right. This is the same position the Chancellor found himself in in 2010 – and as we now know, his plans were left in tatters as the economy underperformed.’

Mr Osborne used the Statement to confirm plans to return Britain to the black, with a surplus of £10.1billion in 2019-20 – the first surplus for nearly 20 years. But the numbers were flattered by an unexpected £ 27billion windfall from higher than anticipated tax receipts and by lower interest payments on the national debt.

Capital Economics warned the plan to balance the books by the end of the decade was based on ‘optimistic’ forecasts by the OBR, the official Treasury watchdog. The report said higher than expected interest rates could ‘scupper’ those plans, forcing the government to raise taxes or cut spending to make ends meet, or ditch its surplus target altogether.

‘There is a good chance that the OBR’s forecasts prove too optimistic on debt repayments,’ said Mr Hollingsworth.

‘This would have significant consequences for consumers and businesses, who could face a double whammy of rising interest rates and, if the Chancellor wanted to stick to his fiscal rules, more austerity.’

Rates have been at a record low of 0.5 per cent since March 2009; the Bank of England is not expected to raise them until early 2017.