LONDON (Reuters) – Britain’s 2 trillion-pound ($2.8 trillion) debt mountain is becoming more exposed to inflation and interest rate shocks which are themselves becoming more frequent, Richard Hughes, chairman of the country’s budget watchdog, said.
Hughes said the Office for Budget Responsibility expected the current rise in inflation – which could surpass 3% according to the Bank of England – would be temporary as the economy bounced back after its pandemic lockdowns.
But the government’s debt stock was increasingly vulnerable to the risk of higher inflation and interest rates, standing at 100% of gross domestic product with shorter average maturities and more inflation-linked bonds, he told BBC radio.
“It used to be the case that governments could inflate their debt away. It is less and less the case as we go into the future,” Hughes said.
The OBR is due to publish a report on the fiscal risks facing the British government at 0830 GMT on Tuesday.
Hughes said the report would not make for easy reading for finance minister Rishi Sunak.
“We are two decades into the 21st century but governments have already faced two once-in-a-century shocks in the 2008 financial crisis and the 2020 coronavirus pandemic and there are reasons to believe that these kind of major shocks are becoming more frequent and more severe,” he said.
Sunak has authorised extra spending and tax cuts worth around 350 billion pounds since the start of the coronavirus crisis, saddling the country with its biggest ever peacetime budget deficit.
He has also promised to get the public finances back on “a sustainable footing” and in March he announced plans to raise corporation tax from 2023 as well as a squeeze on future public spending.
($1 = 0.7204 pounds)
(Writing by William Schomberg; editing by Michael Holden and John Stonestreet)
