Rise in debt costs could dash Budget tax cut hope

Hopes of a tax-cutting Budget have been hit by a recent jump in Government borrowing costs that threatens to blow a hole in the public finances.

Chancellor Jeremy Hunt was in line for £30 billion more than forecast in the Autumn Statement three months ago due to falling energy prices, a stronger economy and lower debt interest payments. Such a windfall would give him scope to extend support for energy bills, increase public sector pay and freeze fuel duty.

It could also allow him to reverse a controversial rise in corporation tax from 19 to 25 per cent next month.

But Hunt’s hands may be tied by a recent rise in market expectations that interest rates may have to stay higher for longer to tame inflation.

The Office for Budget Responsibility (OBR), the fiscal watchdog, is finalising its five-year forecasts for Government borrowing costs, which will be published alongside Hunt’s Budget on March 15. They will reflect that it now costs the Treasury almost 4 per cent to borrow for ten years – more than the rate used in the OBR’s November forecast.

Debt interest payments are set to peak at a whopping £120billion this year but experts warn they may come down more slowly than expected.

The OBR is expected to predict a much shallower recession than feared, but also to warn of a weak recovery over the next five years.