Treasury needs to borrow extra £90bn to pay for rescue package

THE Government is set to borrow an extra £90bn this year and £99bn next year over and above the deficit official forecasters predicted in March, top economists have warned.

Spiralling inflation and the mounting cost of the energy rescue package will send the public finances deeper into the red, according to predictions from analysts at Bank of America.

They said the budget deficit is on track to hit £189bn this financial year and £149bn in 2023-24. It comes as the National Institute of Economic and Social Research (Niesr) warned Jeremy Hunt that raising taxes and slashing spending in next week’s Autumn Statement, to try to fill the hole in public finances, would risk making the situation worse by cutting off support just as the economy risks heading into recession.

Stephen Millard, at Niesr, said “in tough economic times you want to be expanding fiscal policy” rather than reining it in. He added: “What is more, to the extent that there is anything obvious in terms of spending that the Chan- cellor can claw back next week, it is government capital investment – but this is precisely what we need if we are going to grow the economy.”

The think tank suggested reining in spending only by tightening the energy bailout to focus on lower-income households, rather than the universal support in place over the winter.

Official figures revealed the economy shrank by 0.2pc in the third quarter of the year, beginning what is expected to be a prolonged recession stretching on for as much as two years. GDP dropped by 0.6pc in September alone in part because of the extra bank holiday for Queen Elizabeth II’S funeral.

Rising energy costs and other climbing prices also hit family and business finances. The quarterly decline leaves the economy 0.4pc smaller than it was before the pandemic and means Britain is spearheading the world’s fall into recession, as the only G7 nation so far to report a contraction in the third quarter.

The situation is expected to get worse into the winter with inflation running in the double digits, October’s increase in energy bills taking effect and the impact of continued rate rises.

Another contraction in the final three months of the year would put the UK into an official recession, which is usually defined as two consecutive quarters of declining GDP. Yael Selfin, chief economist at KPMG UK, said the third quarter figures marked the start of a “prolonged recession”.

Meanwhile, Germany is set to lead the eurozone into recession as energy prices hammer businesses and households across the Continent. Europe’s biggest economy is “heading for recession”, the European Commission said, along with most of its neighbours.