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UK chancellor Rishi Sunak is set to introduce new fiscal rules in the autumn budget to rein in borrowing.
It comes amid fears that a rise in interest rates, and higher inflation, could severely affect public finances.
The finance minister will use next month’s Budget to illustrate Conservative fiscal discipline ahead of the next election, which will commit him to stop borrowing to fund day-to-day spending within three years.
The rules will also require underlying debt to start falling by 2024-25, the Financial Times reported, citing people familiar with the matter. Currently debt stands at around 100% of gross domestic product (GDP).
Public sector net debt was forecast to rise from 84.4% of national income in 2019-20 to 106.2% in 2024-25 following the health crisis.
In March’s budget, Sunak said that just one percentage point increase in both inflation and interest rates would cost the UK more than £25bn.
“Inflation is one of a number of risks to the public finances that we closely monitor,” the Treasury said on Friday. “That’s why the government is taking action to ensure the public finances return to a sustainable footing.”
In August, inflation in the UK rose to 3.2%, up from 2% in July, to hit its highest level since March 2012.
The rise was more than economists’ expectations for a reading of 2.9%, and reflected a jump in food and drink prices, compared to August 2020, when Sunak’s “eat out to help out” discount scheme cut costs.
The 1.2 percentage point increase between July and August was also the largest since records began in January 1997, however, the Bank of England (BoE) said the surge was “manageable and temporary”.
Watch: What is inflation and why is it important?
Due to the coronavirus pandemic, the Treasury’s previous fiscal rules were put on hold, but Sunak said in the spring that he plans to set out “new fiscal rules later in the year, providing economic uncertainty recedes further”.
Rain Newton-Smith, chief economist at the Confederation of British Industry (CBI), said: “Decisions made this autumn at the Budget and Comprehensive Spending Review will define the UK’s trajectory for the decade ahead.”
The CBI called for the UK government to invest in skills, innovation, net zero and to reform taxes to win huge private sector backing. It also urged increases to capital allowances and a new “green” focus to stimulate investment and accelerate decarbonisation efforts.
“When we look back on this decade, it’s crucial we see a government that took decisive action and unlocked investment. A government that went for growth and made big bets for the UK getting ahead of the international competition. A government that resisted the easy, play-it-safe option, and showed the ambition needed to target the big wins,” Newton-Smith added.
It comes as the chancellor is planning to cut the temporary £20 a week uplift to universal credit, which costs £6bn a year, on 6 October. It will be the biggest benefit cut in the history of the welfare state.
Since the start of the crisis in March 2020, the number of people claiming universal credit has doubled from three million to six million.
However, the exact date the people will stop receiving the money depends on when they usually get their payments.
The move has been strongly criticised, with a Labour spokesperson on Thursday saying: “This is a major cut that will affect millions of families across the country.
“We have given Tory MPs the chance to do the right thing. We would expect them to vote on a motion that will have a major impact on people's lives.”
Watch: What is universal basic income?