UK public finances now more sensitive to rate moves: OBR's Hughes

Britain's public finances have grown more sensitive to interest rate changes since the start of the coronavirus pandemic because of a rapid accumulation of government debt and a change in its structure, the new head of the country's budget watchdog said on Wednesday. Britain is on course for its biggest budget deficit since World War Two, hit by around 200 billion pounds ($259 billion) of emergency spending and an expected slump in tax revenues after the economy shrank by 20% in the second quarter.

Britain's public finances have grown more sensitive to interest rate changes since the start of the coronavirus pandemic because of a rapid accumulation of government debt and a change in its structure, the new head of the country's budget watchdog said on Wednesday.

Britain is on course for its biggest budget deficit since World War Two, hit by around 200 billion pounds ($259 billion) of emergency spending and an expected slump in tax revenues after the economy shrank by 20% in the second quarter. "Our public finances are now more sensitive to interest rate rises than they were before the coronavirus shock because we have a higher debt stock," Office for Budget Responsibility chair Richard Hughes told a committee of lawmakers.

"They are also more sensitive because the average maturity of our debt has been getting shorter." Public debt has topped 2 trillion pounds ($2.6 trillion) and finance minister Rishi Sunak said this week the government could not count on its borrowing costs in financial markets staying close to their recent record lows.

The OBR said in July that a 1 percentage point rise in gilt yields would raise debt servicing costs as a percentage of gross domestic product by just over 0.35 percentage points, compared with an estimate of just over 0.15 percentage points in 2019. OBR board member Charlie Bean, a former Bank of England deputy governor, said there was no urgency to reduce Britain's budget deficit, but that there should be action once the COVID emergency had passed.

"I think it is worth saying that at the current juncture one shouldn't think there is a great urgency in closing the deficit," Bean said. "But as one goes beyond the emergency, then it will be appropriate to stabilise the public finances and potentially start building in fiscal space to recognise that there'll be future bad shocks further down the road."

In the near term, a rise in COVID cases was likely to cause Britain's economic recovery to stall, he added.