George Osborne to reap £21bn windfall from UK’s ‘safe haven’ status

George Osborne

Britain’s record low borrowing costs will hand George Osborne a £21bn windfall in next month’s Budget that could help plug a widening hole in the public finances, reports The Telegraph.

A dramatic fall in Gilt yields over the past three months is expected to reduce the Government’s debt interest bill by £2bn this year alone, rising to £5bn by 2020, according to Capital Economics.

Yields on benchmark 10-year debt fell to a record low of 1.3 per cent last week as investors sought a safe haven from global market turmoil. The 10-year yield was 1.882 per cent at the time of November’s Autumn Statement.

While yields have since edged up to just above 1.4 per cent, the consultancy said that if debt interest costs on Britain’s £1.5 trillion debt pile remained at this level, it would result in a £20bn boost for the public finances by the end of the decade.

Low inflation and expectations that the Bank of England will not tighten policy until the end of the decade have helped to drive down UK gilt yields.

In November, the Chancellor used a £27bn windfall from lower debt interest forecasts and changes to the way the Office for Budget Responsibility (OBR) measures VAT and national insurance receipts to relax a massive squeeze on the state.

However, the recent global turmoil and weak wage growth has threatened to knock the Chancellor’s plans to balance the books off course.

Mr Osborne warned this month that slower growth could weigh on tax receipts.

The Institute for Fiscal Studies said slower pay growth would reduce tax receipts by £5bn over the next four years compared with current forecasts, while turmoil in financial markets would reduce capital tax income by around £2bn. The IFS also highlighted that the Conservatives’ currently unfunded pledge to raise personal allowances for basic and higher rate taxpayers would cost £8bn.

While a £20bn windfall could provide Mr Osborne with some much-needed breathing space, economists have warned that debt interest costs can rise as quickly as they fall, leaving the Chancellor at risk of having to raise taxes or cut spending in future budgets to meet his goal of a surplus by 2020.