OBR calls for continued austerity as UK fails 'stress test'

The Treasury's official watchdog has warned the government not to "easily concede" to the public's "austerity fatigue", reports the Daily Telegraph.

Releasing its fiscal report, the independent Office for Budget Responsibility (OBR) said public borrowing could spiral in the coming years and that the economy would fail if subjected to the sort of "stress tests" regulators use for big banks.

If also predicted that if the UK suffered a recession even less severe than that seen in 2008 and the Bank of England increased interest rates to four per cent to combat a rise in inflation, the government would be forced to borrow £158bn more by 2020/21.

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Robert Chote, chairman of the OBR, said: "Most policy advice would be that in that sort of situation you want to create yourself some fiscal space for the nasty surprises that come down the road."

According to the Financial Times, the main issue would be rising borrowing costs, with a little more than 40 per cent of the UK's £1.4trn core debt pile "exposed to movements in short-term interest rates".

That means increases in rates translate to higher debt servicing costs and even at current record low levels, debt repayments take a larger share of public spending than all but three government departments.

Such a move in interest rates might be unlikely, but debt servicing costs could also be pushed higher by rising inflation as more government bonds are now index-linked.

The OBR said this situation is being made more precarious by the scrapping of 17 cost-cutting measures in the last Budget, reports The Guardian.

Chancellor Philip Hammond has hinted he could increase public spending or ease cuts, saying the Tories were "not deaf" to the message delivered by voters in the snap election last month.

In contrast, the Institute for Fiscal Studies think-tank said this week that the UK could scrap £33bn of tax rises and budget cuts and keep the annual deficit around or below last year's 2.4 per cent level.

That relies on the UK economy to continue to grow, something which is not assured ahead of Brexit.

It would also mean borrowing continues to rise overall, as while the proportion of debt relative to a higher economic output would fall, it would still be rising in cash terms.