Sunak Promises to Keep Bringing Down U.K. Government Debt

(Bloomberg) -- U.K. Chancellor of the Exchequer Rishi Sunak has given a personal guarantee that, short of a crisis, debt will shrink as a share of the economy from 2024 onwards.

In his budget last week, the finance minister set a rolling three-year target to bring down the pandemic-bloated debt burden. But he has faced criticism that the rule would never bite because it moved forward every year.

“Even though it is a rolling forecast, my view is that the right thing for the country’s public finances and the economy is to move on the trajectory we have set, and not for that to keep being pushed out into the future,” he told the House of Lords Economic Affairs Committee Tuesday. “Absent [something unexpected] it should not be the case of taking advantage of a rolling rule to essentially not have any rule. It would not be right, I don’t think that would be responsible. It would undermine the entire point of the fiscal policy.”

Official forecasts released alongside the budget show debt rising as a share of GDP in the first two years and declining only slightly in the third. Sunak has admitted that, all else equal, a 1 percentage point increase in interest rates would mean missing the target.

The Office for Budget Responsibility, the government’s fiscal watchdog, said that “history tells us chancellors tend to take advantage of the additional year by loosening fiscal policy now while planning a large fiscal tightening for the target year.”

Mervyn King, a former Bank of England governor who serves on the Lords committee, asked: “What kind of assurance can you give us that this time will be different?”

Sunak also said he was confident about a strong recovery in the jobs market, following the end of the furlough program on Oct. 1.

“Broadly what I’m seeing, and when I talk to businesses in the informal work that we do, would lead one to be cautiously optimistic that the employment outcome post the end of furlough will not be anywhere near as bad as people feared,” he said.

“We were encouraged in the run up to the ending of furlough that people were returning to employment,” he said. “ We conducted an informal survey of employees and they were all indicative of a positive outcome. We haven’t seen a tick up in redundancy notices. The ratio of job vacancies to unemployed gives you a sense of where the labor market tightness is.”

The state of the labor market is a key factor for the Bank of England as it confronts a resurgence of inflation. The central bank will announce its interest-rate decision on Thursday, with markets expecting an increase from 0.1% to 0.25%.

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