LONDON, Oct 13 (Reuters) - Britain’s debt mountain is likely to rise and hold above 100% of gross domestic product for at least the next few years but Prime Minister Boris Johnson should be in no rush to tackle it with tax hikes, a think tank said.
Public borrowing in 2020 will hit a level unseen outside the two world wars, thanks to the government’s 200 billion-pound ($260 billion) coronavirus spending surge and a 95 billion-pound hole in tax revenues, the Institute for Fiscal Studies said.
Britain’s public debt pile has already hit 2 trillion pounds, or just over 100% of gross domestic product.
The IFS said it was likely to stand at 110% of GDP in the 2024-25 financial year, the end of its forecast period.
“Without action, debt – already at its highest level in more than half a century – would carry on rising,” IFS director Paul Johnson said. “Tax rises, and big ones, look all but inevitable, though likely not until the middle years of this decade.”
Just to keep debt at 100% of national income, the government would need to raise taxes - or cut spending - by about 2% of national income in 2024/25, or 40 billion pounds.
The world’s sixth-biggest economy has weaker growth prospects than some of its peers because of the large share of jobs hit hardest by the pandemic and the drag from Brexit, according to analysts at bank Citi who worked with the IFS.
At the same time, demands for higher spending on healthcare are unlikely to fade.
Finance minister Rishi Sunak ripped up the economic orthodoxy of his Conservative Party by unleashing a wave of public spending at the onset of the pandemic.
He says his priority remains to slow rising job losses although he has replaced his 50 billion-pound wage subsidy scheme at the end of this month with a less generous programme.
Sunak has also “promised to balance the books” in the medium term.
The IFS said borrowing was the right response to the crisis but the government’s low debt servicing costs - the smallest as a share of revenues since the 1600s - could vanish suddenly if the Bank of England has to raise interest rates.
“Any weakening of the independence of either the Bank of England or the Office for Budget Responsibility could be disastrous, as could any sense that the government did not have the health and stability of the economy and public finances at the centre of its concerns,” Johnson of the IFS said.
The government should try to lock in its low borrowing costs by raising the proportion of long-dated bonds that it sells while selling more inflation-linked gilts would dispel any concerns it might be tempted to inflate away debt, he said. (Writing by William Schomberg, editing by Andy Bruce)
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