Britain to borrow an extra £190bn as public finances sink deeper into the red
UK economy shrank by 0.2pc in the third quarter, with a 'prolonged recession' feared
The Government is set to borrow an extra £90bn this year and £99bn next year over and above the deficit official forecasters predicted in March, top economists have warned.
Spiralling inflation and the mounting cost of the energy rescue package will send the public finances deeper into the red, according to predictions from analysts at Bank of America, who said the budget deficit is on track to hit £189bn this financial year and £149bn in 2023-24.
It came as the National Institute of Economic and Social Research (NIESR) warned Jeremy Hunt that raising taxes and slashing spending in next week’s Autumn Statement to try to fill the hole in the public finances would risk making the situation worse by cutting off support just as the economy risks heading into recession.
Stephen Millard at NIESR said “in tough economic times you want to be expanding fiscal policy” rather than reining it in.
“What is more, to the extent that there is anything obvious in terms of spending that the Chancellor can claw back next week, it is government capital investment – but this is precisely what we need if we are going to grow the economy,” he said. He cautioned against aggressively cutting spending hard to hit an “arbitrary target” which would risk worsening the economy’s predicament.
The think tank suggested reining in spending only by tightening the energy bailout to focus on lower-income households only, rather than the universal support currently in place over the winter.
Official figures revealed the economy shrank by 0.2pc in the third quarter of the year, beginning what is expected to be a prolonged recession stretching on for as much as two years.
GDP dropped by 0.6pc in September alone in part because of the extra bank holiday for the late Queen’s funeral. Rising energy costs and other climbing prices also hammered family and business finances.
The quarterly decline leaves the economy 0.4pc smaller than it was before the pandemic and means Britain is spearheading the world’s fall into recession, as the only G7 nation so far to report a contraction in the third quarter.
The situation is expected to get worse into the winter with inflation running in the double digits, October’s increase in household energy bills taking effect and the impact of continued rate rises.
Another contraction in the final three months of the year would put the UK into an official recession, which is usually defined as two consecutive quarters of declining GDP.
Yael Selfin, chief economist at KPMG UK, said the third quarter figures marked the start of a “prolonged recession”.
She said: “Interest rate rises and the prospect of the Bank of England raising them even further could exacerbate the stalemate in the UK housing market, causing more pronounced cutbacks in spending.
“In addition, a turn to a more austere fiscal policy expected from next week’s Autumn Statement could contribute to prolonging any downturn.”
Growth in services output, which is the dominant sector in the economy, ground to a halt in the third quarter. On a monthly basis, it went into reverse in September.
Industries including retail and wholesale, and arts, entertainment and recreation declined in the three-month period. Household spending, a key driver of growth, fell by 0.5pc on the quarter once adjusted for the jump in prices.
Meanwhile, Germany is set to lead the eurozone into recession as energy prices hammer businesses and households across the continent.
Europe’s biggest economy is “heading for recession,” the European Commission warned, along with most of its neighbours.
“Amid elevated uncertainty, high energy price pressures, erosion of households' purchasing power, a weaker external environment and tighter financing conditions are expected to tip the EU, the eurozone and most member states into recession in the last quarter of the year,” the Commission said.