Rachel Reeves faces a £20bn black hole in the public finances due to soaring interest rates and crumbling economic growth, economists at JP Morgan have warned. Rising borrowing costs in financial markets have raised fears that the Chancellor will have to hold an emergency Budget in March to set out plans to raise taxes or slash spending to cover higher interest spending.
But Allan Monks, economist at the investment bank, warns that the economy has hit a wall, in part due to Ms Reeves’s National Insurance raid which has trashed business confidence. Slower growth will in turn lead to lower tax revenues and more borrowing.
“Higher borrowing costs are just the tip of the iceberg, however, and weak growth is instead the main concern. Growth prospects have deteriorated in part due to tax hikes at the last Budget,” he said. “It would appear that all the existing headroom around the fiscal rules is set to evaporate, but also with a net shortfall opening up.
“Depending on the Office for Budget Responsibility’s assumptions, that could leave a fiscal hole worth around £20bn that the government will need to plug in the spring.”. The Chancellor set new borrowing targets in October, promising that in five years’ time she would borrow only to pay for investment with all day to day spending covered by tax revenues.
