Philip Hammond, the chancellor, has been warned by Whitehall’s spending watchdog that continuing uncertainty over Brexit could jeopardise the public finances.
In a report released on Tuesday, the National Audit Office (NAO) says high levels of government borrowing since the financial crash meant there are already significant risks to the UK’s finances.
Sir Amyas Morse, the head of the NAO, said these risks could be exacerbated by “unexpected developments”, including any unforeseen consequences of leaving the European Union.
Auditors said that borrowing had increased since 2009-10 by 61%, while interest payments on the UK’s debts had cost the government £222bn. Over the same period, managing the public finances had become more difficult since the global financial crash of 2008.
The NAO pointed to an increase in the use of index-linked gilts to finance the government’s debts which meant a rise of just 1% in retail price inflation could add £26bn in interest costs between 2016-17 and 2020-21.
The latest warning comes after the trusted Institute for Fiscal Studies warned last week that Hammond could be forced to abandon his target of eliminating the deficit by the mid 2020s when he delivers the budget on 22 November.
Morse said uncertainty over Brexit, as well as the eventual unwinding of the Bank of England’s programme of “quantitative easing”, meant it was essential the Treasury kept the risks under constant review.
“Put simply, public and private borrowing are high, kept affordable by record low interest rates, and quantitative easing continues 10 years after the crisis it responded to,” Morse said.
“There are significant risks to the public finances and any unexpected developments, potentially including consequences of leaving the EU could exacerbate them. In these circumstances, the Treasury needs to constantly monitor these risks and be ready to react quickly and flexibly. It has taken steps to increase its capacity to respond.”
The report is one of several from the NAO which will explore the major risks to public finances. Last week, Morse told the Treasury select committee that the NAO would scrutinise Britain’s Brexit divorce bill to make sure it represented value for taxpayers’ money.
He warned ministers to stop suffering from “optimism bias” over the number of major projects that they planned to implement while trying to leave the EU.
John McDonnell, the shadow chancellor, said the report should make difficult reading for the Conservatives, who hoped to eliminate the deficit by 2015. “Their cuts to corporation tax run the risk of reducing tax revenues in future, while uncertainty about their handling of Brexit and failure to deal with rising inflation pose risks to the public finances as well as to the jobs and living standards of people throughout the UK,” he said.
