Bank of England warns of company debt burden

High interest rates are putting indebted businesses under the most pressure since 2009, the Bank of England has warned.

Half of all businesses with borrowings will be struggling to meet debt payments by the end of this year, the Bank said, up from 45pc last year.

The warning came amid growing pressure on Jeremy Hunt to announce support for the economy as signs of stress increase.

On Tuesday Tory backbenders renewed calls for tax cuts to stimulate growth after official figures showed the Government borrowed less than expected again in July, aided by a resilient economy and a windfall from stealth tax raids on income.

Douglas McWilliams, founder of the Centre for Economics and Business Research and co-chairman of the Liz Truss-backed Growth Commission, urged the Chancellor to consider cutting corporation tax to boost growth.

He said reducing the levy “would be the biggest benefit to the economy” as extra investment boosts other activity.

Sir Jacob Rees Mogg, the former Business Secretary, said inheritance tax should be scrapped, arguing that the Government had more than enough money to afford to axe it given the state of public finances.

He told : “Inheritance tax could be abolished within the margin of the OBR’s 20pc quarterly error with billions to spare.”

Calls from backbenchers for tax cuts are growing louder as the Tory Party continues to trail in the polls and amid signs that businesses and mortgage holders are increasingly feeling the strain from higher interest rates.

The Bank of England warned in a blog post there was a growing risk that companies would default on their debts, which would impact “investment and employment sharply”.

Medium-sized businesses – those with a turnover of between £10m and £500m – are particularly at risk. 70pc may struggle to meet repayments on their debts by the end of 2023, the Bank said.

Elsewhere, factory production is already falling at the fastest pace in nearly three years as manufacturers grapple with high rates and inflation hits consumer demand.

In the three months to August, manufacturers suffered the sharpest drop in output since September 2020, according to the Confederation of British Industry (CBI).

Martin Sartorius, CBI principal economist, said: “The weak outlook for manufacturing activity underlines the need to double-down on delivering sustainable growth.

“With fierce levels of international competition, the race is on for the UK Government to offer targeted incentives to attract green investment and support firms’ decarbonisation efforts.”

Official figures from the Office for National Statistics (ONS) confirmed that the Government has borrowed £56.6bn so far this year, which is £11.3bn less than expected by the Office for Budget Responsibility (OBR).

The Government borrowed £4.3bn last month, according to the ONS, which was £700m below forecasts.

Julian Jessop at the Institute of Economic Affairs – an influential think tank in Conservative circles – said: “There may be more room for tax cuts than previously thought. But the outlook is unusually uncertain.”

Mr Jesop said slashing taxes was crucial to boosting economic growth.

He said: “The best way to fix the public finances is to grow the economy, and tax cuts could still be part of the solution.”

Borrowing came in lower than expected after a 6.3pc rise in tax receipts last month. Income tax, corporation tax and VAT receipts all grew in July.

The freeze on income tax thresholds has been a particularly powerful source of extra cash for the Treasury as inflation and higher pay has pushed more workers into higher tax brackets, even as their wages stretch less far in the shops.

Receipts from self-assessment were up by more than a quarter to £11.8bn in July. Inheritance tax raked in £603m for the Treasury.

A Government spokesperson said: “Driving down inflation is the most effective tax cut we can deliver right now which is why we are sticking to our plan to halve it, rather than making it worse by borrowing money to fund tax cuts.”