Sunak’s sleepless nights as he fights to control UK debt

JUdgIng by the bags under Rishi Sunak’s eyes there is much keeping the Chancellor awake at night, and nothing more so than the mammoth UK debt pile.

Sunak has had no option but to open the taps during the pandemic and while there is still much more spending to come, he has made it clear this cannot carry on forever and that he wants the country’s debt firmly under control.

At the moment the UK’s debt stands at £2.1 trillion and the deficit will reach £355bn for this fiscal year, a peacetime record. next year it will be £234bn.

To put the figures in context, in the March 2020 Budget when coronavirus was still little known and the nation’s finances were in decent shape, the Office for Budget Responsibility (OBR) pencilled in a deficit of £55bn for this year.

For now, borrowing costs are at record lows, 1.2pc at effective rates, and so the debt is serviceable.

But the situation is fragile and the one big worry on the horizon is inflation, which could undo all Sunak’s fiscal plans.

Inflation is predicted by the OBR to hover around 2pc over the next few years but could well spiral, driven by a huge government spending boom as well as the uncorking of the billions households and companies have saved during the pandemic.

Should inflation rise, the Bank of England may be forced to raise interest rates, meaning servicing the UK debt pile will become considerably more expensive.

Sunak said: ‘While our borrowing costs are affordable right now, interest rates and inflation may not stay low forever and just a 1pc increase in both would cost us over £25bn. And as we have seen in the markets over the last few weeks, sovereign bond yields can rise sharply.

‘Over the medium term, we cannot allow our debt to keep rising, and, given how high our debt now is, we need to pay close attention to its affordability.’ The OBR warned that only a marginal change in interest rates would wipe out the tax raised from his proposed hike in corporation tax, which is expected to bring in an extra £17.2bn a year by 2025.

Richard Hughes, chairman at the OBR, said: ‘If interest rates were to rise a full percentage point this would cost an additional £20bn per year and wipe out the corporation tax revenues raised by the Chancellor.’

Rising inflation is a worldwide concern, but many politicians and central bankers have been reluctant to rein in spending.

Sunak, however, does not belong to this camp and instead wishes to emulate previous Tory chancellors who restored the nation’s coffers in times of crisis.

Setting out his philosophy, he said his decisions were guided by three principles: ‘First, while it is right to help people and businesses through an acute crisis like this one, in normal times the state should not be borrowing to pay for everyday public spending.

‘Second, over the medium term, we cannot allow our debt to keep rising, and, given how high our debt now is, we need to pay close attention to its affordability.

‘And third, it is sensible to take advantage of lower interest rates to invest in capital projects that can drive our future growth.’

Sunak’s prudent nature also comes from spending his early career at The Children’s Investment Fund, a Mayfair-based hedge fund, during the financial crisis, when the economic system nearly collapsed.

He is said to be one of the most accessible chancellors and holds a once-a-week online call with business leaders.

This has been interpreted by many businessmen as sensible forward planning from a politician who might one day want to move next door to no 10.

If Sunak manages to solve the nation’s current debt problems, no one would rule him out of a shot at the top job.