Secret stress tests find small interest rate rise could cost UK dear

‘I’m not exactly the most virtuous person in voting against my party. But I’ve never voted against a Budget in my life. If it’s a tax-raising Budget I will’

‘I consider it quite likely that additional monetary easing will be appropriate to achieve a sustained return of inflation to the 2pc target’

Christopher Hope

Tim Wallace

THE Treasury has been warned that a modest rise in the cost of borrowing would cost the equivalent of the UK’S entire annual defence budget.

Secret “stress tests” by Treasury officials in recent weeks found that a hike in interest rates from 0.2 per cent to one per cent would increase the Government’s borrowing costs by between £30 billion and £40 billion a year.

The figure equates to the £41billion which the Ministry of Defence spends every year on the Armed Forces and other defence assets.

The forecasts are likely to fuel calls for the Bank of England to continue with quantitative easing (QE) – currently only guaranteed until the end of the year – which can help to keep down the cost of borrowing. Yesterday The Daily Telegraph disclosed how Conservative MPS are threatening to vote down the Budget in November if largescale tax rises are tabled.

Today David Davis becomes the first senior Tory to threaten a Commons rebellion, telling The Week in Westminster on BBC Radio 4: “I’m not exactly the most virtuous person in terms of not voting against my party. But I’ve never voted against a Budget in my life. If it’s a tax-raising Budget I will.”

The Treasury’s stress tests increased during the pandemic as the Government spent hundreds of billions of pounds to fund the UK’S response. The most recent test is thought to have been carried out after the UK’S stock of debt breached 100 per cent of GDP last month. Treasury civil servants examined the debt, and then set out a number of different “futures” for the UK economy. Even before the full extent of the pandemic was known, analysis of the International Monetary Fund forecasts in April showed the UK’S debt as a proportion of GDP would close in on the 100 per cent mark, soaring from 86.2 per cent in 2017 when the Government had been working to cut the deficit.

It is part of a global wave of borrowing as governments have scrambled to prop up their economies with tax cuts and extra spending. The UK is on track to borrow more than £300billion this year, potentially double the £158billion peak deficit seen at the height of the financial crisis in 2009-10.

Steve Baker MP, a former Tory minister and a member of the House of Commons Treasury select committee, told The Telegraph yesterday that he was “chronically alarmed that we are borrowing so much money and yet the Bank is still doing more QE”.

That came after Michael Saunders, a member of the Bank of England’s Monetary Policy Committee, indicated more QE or interest rate cuts could be on the way. He said yesterday: “I consider it quite likely that additional monetary easing will be appropriate in order to achieve a sustained return of inflation to the 2 per cent target.”

Last night a Treasury spokesman said: “There’s no question the pandemic has put considerable strain on the public finances … We are now in an acute recession and our national debt is bigger than our economy. But it’s also clear that if we hadn’t acted, things would have been a lot worse. Our Plan for Jobs will support growth, employment and stronger public finances over the medium to long-term.”