Autumn Statement  

UK govt debt to cost £70bn more than expected, OBR warns

UK govt debt to cost £70bn more than expected, OBR warns
 

A weaker economy and high inflation will drive the cost of the government’s debt up by £70bn more than expected, the chancellor has been warned.

The Office for Budget Responsibility has predicted government debt will cost £100bn by 2026-27, after originally predicting in March that it would cost £32bn in this period.

Half of this extra cost will come from a rise in the cost of servicing government debt, with the remainder due to a lower amount collected from taxes due to weaker economic growth, as well as inflation pushing up the cost of welfare benefits and state pensions.

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The news was first reported in the FT.

The warning comes before Jeremy Hunt presents his Autumn Statement on Thursday (November 17).

The predictions will be increasing the likelihood of tax rises and spending cuts to raise between £40bn and £55bn annually. 

Hunt has prepared the UK for higher taxes and lower public spending as a result of this “fiscal hole” which must be filled if Hunt’s pledge to drop public debt as a share of gross domestic product in the next five years will be fulfilled.

“We are going to everyone paying more tax…we are going to see spending cuts,” Hunt told the BBC yesterday.

Hunt is expected to announce a “supermarket sweep” of so-called stealth taxes, by freezing tax bands.

This means the rate at which tax is paid on income will remain the same, despite salaries increasing, dragging more people into higher tax bands.

The personal allowance bands are already frozen until April 2026, and Hunt is expected to extend these. 

The initial four-year extension will raise around £30bn a year by 2025-26, according to the Institute for Fiscal Studies, which translates to a further £10bn a year by 2027-28 according to estimates by the FT.

Personal tax allowance bands

Band

Taxable income

Tax rate

Personal allowance

Up to £12,570

0%

Basic rate

£12,571 to £50,270

20%

Higher rate

£50,271 to £150,000

40%

Additional rate

over £150,000

45%

Source: HM Treasury

Hunt is also expected to cut the additional rate from £150,000 to £125,000, and halve the £12,300 annual allowance for capital gains tax.

The Treasury had previously confirmed it is looking at changing the tax-free allowances for capital gains tax, including potentially scrapping the CGT uplift on assets that occur on death, which means individuals inheriting assets would have to pay capital gains tax on those assets.

There has also been the suggestion that the government was looking at making CGT payable for primary homes, though this has been disregarded as it would not necessarily raise enough money.

Other measures touted include a rise in the dividend tax rate, a freeze in the threshold at which inheritance tax is paid and scrapping the higher-rate pension tax relief.

The lifetime allowance may also be frozen at just over £1mn for a further two years, which would cost savers nearly £65,000, according to AJ Bell.

The allowance was frozen by prime minister Rishi Sunak for the 2020-21 tax year, and was expected to "un-freeze" in the 2026-27 tax year. 

“The impact a seven-year lifetime allowance freeze could have on retirement savings incentives is huge," said head of retirement policy at AJ Bell, Tom Selby.