(Bloomberg) -- The UK’s budget watchdog cast doubt over Prime Minister Rishi Sunak’s claim that he is on track to bring down government debt as inflation ramps up the pressure on department budgets.

Richard Hughes, chair of the Office for Budget Responsibility, said the aim of lowering debt as a share of the economy in five years is “certainly at risk” because of “lots of pressures pushing up on spending and pushing down on revenues.” 

He told the House of Commons Treasury Committee there is a danger public spending increases after Chancellor of the Exchequer Jeremy Hunt in his Autumn Statement last week failed to compensate departments for the real-terms squeeze caused by high inflation.

Bringing down the debt burden was one of five key pledges made by Sunak earlier this year as he sought to close the opinion-poll gap between the ruling Conservatives and opposition Labour Party. The government has pointed to the OBR forecasts showing the debt-to-GDP ratio burden falling by the end of the forecast in 2028-29.

Under the projections, Hunt has just £13 billion ($16.4 billion) of headroom against his target. However, lingering inflation now means departmental budgets are facing £19 billion of cuts relative to the funding the Treasury had envisaged in March, implying a squeeze on public services that could prove impossible to deliver.

“There are also risks around the path of public spending, which is now much tighter in real terms than it was back in our March forecast because inflation has gone up but the government hasn’t really adjusted its public spending plans,” Hughes said. Fuel duty, which the government regularly freezes, will also put pressure on the finances, he added.

Another factor putting the public finances under strain is the Bank of England’s so-called “quantitative tightening” program, under which it will unwind the gilt purchases made from 2009 to 2021 to support growth after interest rates were cut to zero.

The OBR expects the BOE to make a £250 billion loss by 2031, more than offsetting the £124 billion gain. OBR official Tom Josephs agreed with committee chair Harriett Baldwin that the £126 billion net loss was “ultimately a cost to the exchequer.”

Last week, BOE Deputy Governor Dave Ramsden said: “There is no mechanistic read-across from what happens on the cash flows to the overall fiscal stance.”

Testifying to the Treasury Committee, Hughes played down concerns that the tax-cutting package announced by Hunt would fuel inflation. The government is still set to take more from people by freezing tax thresholds than it gives back in tax rate cuts, he said, and policies aimed at boosting labor supply should offset the boost to demand from cutting taxes.

“I don’t think that the impact of the policy package in this Autumn Statement makes a material difference to the outlook for inflation or prices. It does make a small one, however” — a 0.1% uplift to the level of prices in five years.

 

 

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