UK government debt interest payments hit record high in August after rising inflation

UK Public Finances Updates

UK government borrowing exceeded economists’ forecasts last month as rising inflation pushed up the cost of indexed government debt.

Net public sector borrowing was £ 20.5 billion in August, down £ 5.5 billion from the same month last year, data from the National Statistics Office shown Tuesday.

Net borrowing was slightly lower than the £ 21.6 billion predicted by the Office for Budget Responsibility, the UK’s budget watchdog, but much higher than the £ 15.6 billion predicted by economists polled by Reuters.

Interest payments on public debt reached £ 6.3bn, £ 2.9bn more than in the same month last year and the highest figure in August since records began in 1997.

Interest payments were also much higher than the £ 1.6bn forecast by the OBR following a rapid rise in retail price inflation, at which many debt payments are related. Indexed gilts represent 25 percent of UK public debt.

British Chancellor Rishi Sunak plans to use next month’s budget to set new rules to curb government borrowing as Treasury fears higher inflation will cause interest rates to rise, making it difficult to cut of public debt.

The Bank of England has signaled that some tightening of monetary policy may be needed to keep inflation under control.

Commenting on the data, Sunak said: “We are determined to get our public finances back on track – which is why we have defined the targeted and responsible actions we are taking to keep debt under control.”

Public finances were much stronger than expected by the OBR for the fiscal year through July thanks to a faster than expected economic recovery which boosted tax revenues and constrained public spending.

However, Samuel Tombs, UK chief economist at Pantheon Macroeconomics, expected “significant” increases in RPI to push interest payments on debt this year to £ 13.5 billion more than the OBR. predicted in March. This would translate into a global borrowing broadly in line with the OBR’s budget forecast for the remainder of the year.

For the first time, public finance figures included £ 21bn in allocations for government-backed emergency business loans made during the pandemic that will never be repaid. This corresponds to a quarter of all loans and has pushed up the borrowing figure for the 2020-2021 fiscal year.

Isabel Stockton, research economist at the Institute for Fiscal Studies, said that for the overall health of public finances, “the precise size of last year’s historic borrowing surge is not that important.”

“What matters most is the strength of the eventual recovery,” said Stockton. “[This will] determine whether the Chancellor can afford to complete tight spending plans during next month’s spending review to address some of the many challenges facing public services while staying on track to eliminate the current budget deficit at middle term.

In August, central government revenue amounted to £ 61.2 billion, up £ 5.3 billion from the same month last year, reflecting increased revenue from the income tax, payroll taxes, stamp duties and trade rates as the economy continued to recover.

Despite the increase in interest payments, UK central government agencies spent £ 79.6bn in August, £ 1bn less than a year ago, thanks to sharp cuts in the cost of the coronavirus job retention program and self-employed income assistance.

Column chart representing the percentage of UK GDP, over the years, showing that public debt reached levels last reached in the early 1960s

However, the country still recorded the second-highest August borrowing since monthly records began in 1993, driven by more than 50 programs launched to support individuals and businesses during the pandemic.

Public sector net debt, or borrowing accumulated over time, accounted for 97.6% of gross domestic product, the highest ratio since the early 1960s.

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