Beware of debt costs and an inflationary bite, former UK advisers say

LONDON (Reuters) - The British government should be wary of assuming its mammoth debt pile will always be so cheap to service or that inflation is dead and so must ensure fiscal security by pushing ahead with a digital tax, six former government advisers said on Monday.

The United Kingdom is facing its steepest economic decline in three centuries of modern British history and is borrowing vast amounts from the bond markets to inject money into the hemorrhaging economy.

Prime Minister Boris Johnson's government should beware of rising debt costs and the surprise of an inflationary bubble, former advisers to prime ministers Theresa May and David Cameron said in a report for the Onward think tank.

"The volatile history of interest rates should make us wary of thinking low real interest rates are here forever," said the advisers including Mats Persson, former adviser to Cameron, and Raoul Ruparel, a former adviser to May.

"The possibility of surprise inflation still exists," they said. "In the 1970s, inflation peaked at over 25% in the UK, a level few had predicted only a few years earlier."

The advisers, including May advisers Neil O’Brien and Will Tanner, said reform of the UK's tax system was essential, including a digital tax.

"This should be prioritised regardless of concerns from partners such as the U.S. over a digital services tax," they said.

The U.S. has threatened trade retaliation against European countries that create their own digital taxes as a way to raise revenue from the local operations of big tech companies such as Alphabet Inc’s Google and Facebook Inc.

(Reporting by Guy Faulconbridge; Editing by Alistair Smout)