Government Borrowing Leads to Inflation, UK’s Sunak Says

Prime Minister Rishi Sunak delivers a speech during a reception for world leaders, business figures, environmentalists, and NGOs, hosted by King Charles III ahead of the Cop27 Summit at Buckingham Palace, London, on Nov. 4, 2022. Jonathan Brady/PA Media

The government “cannot do everything” because big government borrowing ultimately leads to soaring inflation and high interest rates, the UK’s Prime Minister Rishi Sunak said on Friday.

It comes after the Bank of England raised its base interest rate to 3 percent and forecasted a two-year recession.

In an interview with The Times of London, Sunak said he would “do absolutely everything” he can to limit the rise in mortgage rates, adding, “I think inflation is the number one enemy.”

The Times said the prime minister refused to rule out “a return to austerity” or to comment on any specifics in fiscal policies ahead of his chancellor’s autumn budget announcement scheduled on Nov. 17, saying there are “difficult decisions to come,” but people will “be able to judge” it as being “a fair approach.”

Sunak also said he’s “confident” the people will also feel it’s a “compassionate approach.”

But the prime minister said it’s “right” to be honest about the trade-offs, saying, “everyone appreciates that the government cannot do everything. ”

“How does [the] government do everything? It just does it by borrowing money which ultimately leads to, as we saw, high inflation, a loss of credibility, spiking interest rates. Actually, the argument in one sense was made over the summer,” he said, alluding to the market turmoil that came after his predecessor Liz Truss’s “mini-budget” that sought to reduce taxes, increase spending, and pursue economic growth.

He said the market reactions following Truss’s mini-budget showed “the danger of what is a traditionally Labour approach to the economy which is being much more complacent about borrowing,” but declined to lay all the blames on “Trussonomics,” saying, “It’s important to remember there are global challenges” caused by the COVID-19 pandemic and Russia’s invasion of Ukraine.

During Sunak and Truss’s leadership campaign race in July and August, Sunak labeled Truss’s economic plan to cut taxes immediately as being a “fairytale” while Truss criticised the former chancellor’s tax increases, saying they would kill economic growth and lead to lower revenue.

Debt, Deficit, Tax, and Interest Rates

According to official figures, the successive UK governments spent more money than they had received in taxes in most years since the 1900s. The deficit (annual borrowing) as a percentage of GDP climbed down after a peak during the 2008 economic crisis but spiked again during the COVID-19 pandemic. The net debt (accumulative borrowing) as a percentage of GDP, which had slid down over the decades after World War II, has also been on a steeper upward trend after 2008, ranking the fifth highest among OCED countries in 2021.

Sunak dished out an estimated £147 billion in business support packages during the COVID-19 lockdowns, but the former chancellor has sought to distance himself from the Boris Johnson government’s decision to impose the restrictions, saying he had not been allowed to “talk about the trade-off” during the early phases of the pandemic.

In 2020, the UK’s tax burden was 32.77 percent of the GDP, slightly below the OECD average.

In the fiscal year 2021–2022, the Treasury raised more than £915 in taxes—around 39 percent of the GDP.

The Bank of England on Thursday hiked its base interest rate to 3 percent, the highest in 14 years, but it remains relatively low compared to historical figures from the last five decades.