The Telegraph, January 24, Roger Bootle
How serious is the state of the UK’s public finances? Are things so bad that Conservative backbenchers’ dreams of rescinding the planned increases in National Insurance contributions and corporation tax are pie in the sky?
Tuesday’s public finance figures for December may show borrowing of some £19bn, about £2bn more than the Office for Budget Responsibility (OBR) forecast.
Although borrowing is still on course to hit the OBR’s forecast of £183bn (7.9pc of GDP) for 2021-22, next year’s total is likely to be a good deal higher than forecast.
The reason may seem paradoxical – higher inflation. For 2022 the OBR forecast CPI and RPI inflation to average 4pc and 5pc respectively, compared to a more likely outturn of 5.8pc and 8pc.
Economists usually expect higher inflation to reduce public borrowing, rather than to increase it.
But in this case several special factors are at work. First, the UK has issued a huge amount of index-linked debt whose interest payments are tied to the general price level as measured by the RPI, which has been rising much faster than the CPI.
On my inflation forecasts, for the coming financial year debt interest on index-linked gilts is likely to be about £15bn more than the OBR forecast.
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