High inflation could cost UK billions, says Sir Charlie Bean
Surging inflation as the economy recovers from the pandemic could cost the government billions of pounds, a senior official at the Treasury’s spending watchdog has warned.
Sir Charlie Bean, lead macroeconomic forecaster at the Office for Budget Responsibility, said that a rapid recovery may drive up prices and force the Bank of England to raise rates.
Britain’s vast debt pile, now larger than the economy after the pandemic, leaves it vulnerable to changes in borrowing conditions. Higher rates would cause “the debt interest contribution [to] rise quite sharply”, potentially derailing government spending plans.
Drawing a parallel with Greece and Italy in the eurozone debt crisis, the former Bank of England deputy governor said that the chancellor could not afford to lose the confidence of markets and urged him to ensure that debt falls under the fiscal rules he adopts.
“One shouldn’t be content with simply stabilising debt-to-GDP,” Sir Charlie told The Times.
Low government borrowing costs have been a blessing this year, reducing the cost of servicing the national debt by up to £20 billion a year despite the extra £560 billion of borrowing projected over the parliament.
This year alone the government is borrowing £394 billion to protect jobs and businesses, a peacetime record of 19 per cent of GDP. OBR models show that a 1 percentage point rise in interest rates, market rates and inflation would add £23 billion to annual debt service costs, equivalent to just under half the defence budget or 4p on income tax.
Sir Charlie, 67, cautioned the chancellor against relying on low rates to manage the public finances and set out scenarios under which servicing Britain’s £2.2 trillion of debt pile becomes cripplingly expensive.
Inflation is below the Bank’s 2 per cent target at 0.9 per cent at present but he warned that one source of rate rises “would be through inflationary pressure as the economy rebounds”.
If markets decide that the government does not have a credible plan for the public finances, or a firm commitment to control inflation, investors will start demanding a “higher risk premium” on sovereign debt that makes it more expensive for the state to borrow.
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