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Rishi Sunak Warns of Tax Increase If Interest Rates Rise

The UK chancellor, Rishi Sunak, has warned of tax rises in the country if interest rates increase.  With the current crisis causing the government’s borrowing to reach massive levels, there is now genuine fear that rising interest rates could cause major problems.

What Did Sunak Say?

In an interview, the chancellor pointed out that the UK is now “sensitive” to interest rate changes, as the amount of money borrowed to deal with the difficult financial situation continues to grow. He said that the current interest rate on the borrowed funds is very low, meaning that the amount of interest paid is “exceptionally low” right now.

However, he pointed out that no one has a “perfect crystal ball” that would let us see what might happen to inflation and interest rates in the future. The chancellor also pointed out that a crisis like this throws the day-to-day borrowing of the government “out of whack”.

This came as the Office for Budget Responsibility (OBR) confirmed that the country’s debt may reach £2.8 trillion by the year 2025. The Treasury watchdog believes that borrowing will reach £394 billion annually this year. Together with the economy shrinking by 11.3%, this makes it the worst recession to hit Britain in around three centuries.

The OBR thinks that the government will need to continue borrowing a minimum of £100 billion each year for the next five years. They also think that the economy will still be up to 6% smaller by 2025 than it would have been without the pandemic. This is shown in the continuing reliance of many businesses on collection agency fees just now.

In addition, they think that spending cuts or some form of tax rises in the region of between £21 billion and £46 billion will be needed just to stop the debt climbing in relation with the GDP. The current prediction though is that debt will remain far above the GDP into the middle of this decade.

How Much Could Taxes Rise By?

To get an idea of the scale of the issue, we can see what would happen if just a penny was added to the basic rate of income tax. This would produce about £6 billion each year in extra income, far short of what appears to be needed.

Despite all of this, Sunak appeared confident that the latest news on the vaccine for Brits could signal the beginning of a return to normality. He stated that “confidence is critical”, and that this is especially true in an economy like the British one, where much of it is driven by consumption and consumer confidence.

He went on to encourage people to return to the shops and to carry out their Christmas shopping, with the help of the extended opening hours that have now been introduced.

It has also recently been predicted that the UK is likely to be one of the countries most economically affected by the coronavirus crisis. Yet, it is hoped that the quick moves to introduce the vaccine across the country could help to reduce the impact.