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Rise in debt costs could dash Budget tax cut hope

Problems: Chancellor Jeremy Hunt

Tax cut hopes Budget hit by recent spike in government borrowing costs that threatens to blow up public finances

Problems: Chancellor Jeremy Hunt

Problems: Chancellor Jeremy Hunt

Hopes for a tax-cutting budget have been dashed by a recent increase in government borrowing costs that threatens to blow up public finances.

Chancellor Jeremy Hunt was in line for £30billion more than forecast in the Autumn Statement three months ago due to lower energy prices, a stronger economy and a lower debt interest payments. Such a windfall would give him the opportunity to extend coverage of energy bills, raise public sector wages and freeze fuel taxes.

It could also allow him to reverse a controversial corporate tax hike from 19% to 25% next month.

But Hunt’s hands may be tied by a recent rise in market expectations that interest rates may need to stay higher for longer to bring inflation under control.

The Office for Budget Responsibility (OBR), the budget watchdog, is finalizing its five-year forecast of government borrowing costs, which will be released alongside Hunt’s budget on March 15. They will show that it now costs the Treasury almost 4% to borrow for ten years – more than the rate used in the OBR’s November forecast.

Isabel Stockton, from the Institute for Fiscal Studies, said: ‘Debt interest payments are expected to peak at £120billion this year, but experts warn they could fall more slowly than expected.’ The OBR is expected to predict a much shallower recession than feared, but also warn of a weak recovery over the next five years.

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