UK's Hunt risks busting his budget rule, head of fiscal watchdog says

By William Schomberg

LONDON (Reuters) - British finance minister Jeremy Hunt risks smashing one of his budget rules because he is already running close to its limit and there will be many spending and tax pressures ahead, the head of Britain's budget watchdog said on Thursday.

The Office for Budget Responsibility estimates that Hunt's new tax and spending plans, announced on Wednesday leave him with a buffer of only 6.5 billion pounds ($7.85 billion) for hitting his target of getting debt as a share of economic output falling in five years' time.

OBR Chair Richard Hughes said Hunt had given himself more leeway last November when he extended the target horizon by two more years.

"So even with two years of extra time, and a somewhat brighter economic outlook, and a bit more potential output in the long run from higher employment, he is still struggling to meet that fiscal rule," Hughes said at a panel discussion about the budget organised by the Resolution Foundation think-tank.

Hunt used his budget on Wednesday to announce extra spending on childcare, tax rule changes and other incentives to get more people into work, alongside incentives for business investment, in a bid to speed up Britain's slow pace of economic growth.

Hunt was likely to face calls for further freezes of fuel duty - a regular feature of budgets over the past decade - and he has suggested he also wants higher spending on defence and future reductions in taxes for businesses, Hughes said.

"When you combine those things, that busts the rules by a country mile," he said.

Hunt and Prime Minister Rishi Sunak committed to the latest version of Britain's fiscal rules in November after the chaos in bond markets triggered by former Prime Minister Liz Truss's big, unfunded tax cut plans.

Speaking at a separate event, the director of the Institute for Fiscal Studies think-tank, Paul Johnson, said the budget rules also appeared to lie behind the government's decision to put a three-year limit on a new tax incentive for business investment.

Making the incentive last longer would have pushed up debt levels in the crucial fifth year of the government's target.

"This really is the tail of a badly designed fiscal rule wagging the dog of fiscal policy. Government needs to learn that stability and consistent long-term strategy are vital for companies looking to invest," Johnson said.

($1 = 0.8283 pounds)

(Writing by William Schomberg; Editing by Christina Fincher)