However, estimates from the Office for Budget Responsibility (OBR) suggest that just £6bn of headroom will be available for next month’s Autumn Statement – the smallest margin since the watchdog was set up in 2010 and minuscule compared to Britain’s £2.6 trillion debt pile.
Given the figures, it will come as no surprise that Mr Hunt will take a cautious approach when carving up the nation’s finances in November, which may be essential given the Bank of England has already warned that interest rates will remain higher for longer.
Officials on Threadneedle Street, led by Governor Andrew Bailey, have already raised interest rates to 5.25pc in the fight against inflation.
Yet, despite higher borrowing costs weighing heavily on households, Bailey has been clear that no rate cuts are on the horizon.
His nine-strong Monetary Policy Committee (MPC) will reinforce this message this week if they keep borrowing costs on hold.
The importance of bringing down inflation is evident, as the cost of living crisis saw price rises peak at 11.1pc last year, more than five times the Bank’s 2pc target.
The rate of growth has since slowed to 6.7pc but Bailey has been at pains to stress we must still clamp down further.
In turn, this is critical for Hunt.
If financial markets think rates are going to stay high for five years, that will affect how much money the OBR pencils in for interest payments and hinder the Chancellor’s ability to hit his borrowing targets.
Every additional one percentage point on rates adds £15bn to the Government’s debt interest payments per year – equivalent to more than 2p on the basic rate of income tax.
Back at the Budget in March, the OBR thought interest rates would peak at around 4.25pc, falling back to 3pc by the end of 2026.
The base rate has already risen to 5.25pc, and markets currently expect it to remain at 4.25pc by 2026.
This is bad news for the Chancellor, says Carl Emmerson at the Institute for Fiscal Studies.
“It really does matter for the fiscal arithmetic,” he says. “In the Budget in March, the OBR forecast £89bn of debt interest spending for 2026-27. If you took the latest market expectations, you would add about £20bn to that.”
The spiralling costs explain part of the Treasury’s intense focus on tackling inflation.
“The best thing we can do to cut borrowing costs is support the Bank of England to cut inflation,” says a Treasury spokesman.
“We had to borrow during the pandemic to protect lives and livelihoods, but since then Vladimir Putin’s invasion has pushed up inflation and interest rates. This means we spent twice as much on debt interest last year as we did the previous year.
“This is clearly not sustainable.”
Worse still, the usual feedthrough of interest rates to government borrowing costs is higher because of the Bank of England’s stock of bonds held under the quantitative easing (QE) programme.
The Bank bought £875bn of government bonds in response to the financial crisis and the pandemic in a bid to stimulate the economy.
As part of the process, the Bank created electronic money to pay for bonds on which it had to pay interest.
When rates were low, this meant the Bank made a profit because the interest paid on the reserves was lower than the interest received on the bonds bought through QE.
The haul peaked at a cumulative £123.8bn last year.
However, now the base rate is 5.25pc, the Bank is haemorrhaging cash in interest payments.
Another issue is that as it sells gilts under the quantitative tightening (QT) programme, it makes a loss.
This is because the Bank is now selling bonds amid falling prices, which crystallises losses on the transactions.
The Government is on the hook for these too, as it gave the Bank of England an indemnity to cover any losses when the QE programme launched in 2009.
Michael Saunders, a former MPC member now at Oxford Economics, estimates that the fall in gilt prices since the Budget will add an extra £15bn to future annual losses, taking them to an average of £35bn per year between now and 2027-28.
As markets react to the Bank’s guidance, any hint of lower interest rates will save the Government significant amounts from reduced borrowing costs and trimmed losses from QT.
As it is, Bailey and his colleagues have been doing their best to rule out that possibility.
Earlier this month, the Governor said: “Higher for longer is the best judgement that we have at the moment of where we think rates will be.”
Huw Pill, the Bank’s chief economist, said it is “premature” to talk about cutting rates, while Ben Broadbent, a deputy governor, said the effect of high interest rates may so far have been “slightly weaker than in the past”.
This week the MPC, led by Bailey, is expected to hammer the message home at its next meeting.
Sandra Horsfield, economist at Investec, says the key point for Bailey is that “monetary policy depends on the ability to influence expectations.”
“Messaging here is quite crucial. If the MPC says ‘if inflation comes down we will cut rates immediately’ that would not give the tone that it is very serious about bringing inflation back to target any time soon,” she says.
“They cannot send the message that they will cut rates as soon as things start to look a little bit softer. It is important to maintain that momentum, if the indications we have on wage data, for instance, are still very uncomfortable.”
Kallum Pickering, economist at Berenberg Bank, says the MPC “will not close the door on further rate rises”, but adds that the economy has been weaker than the Bank predicted when it set out its economic forecasts in August.
Around half the rise in interest rates is yet to feed through to mortgage borrowers as more families on cheap fixed-rate loans roll over onto more expensive products.
It means the economy is set to remain weak, but rather than this leading to expectations of a rate cut, the Bank is pushing markets to expect high borrowing costs for the long haul. It also means the Chancellor faces weak growth and high borrowing costs.
Andrew Goodwin at Oxford Economics says: “The problem the Government has here is that the OBR will be drawing a line [when calculating its economic forecasts] just at the point when interest rates are very high.
