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UK borrowed £14bn in May as inflation drove up interest debt costs – business live | Business

Sunak: Rising inflation and debt interest costs challenge the public finances

Chancellor of the Exchequer, Rishi Sunak, has warned that rising inflation is a challenge to the public finances:

“Rising inflation and increasing debt interest costs pose a challenge for the public finances, as they do for family budgets.

“That is why we are taking a balanced approach – using our fiscal firepower to provide targeted help with the cost of living, while remaining on track to get debt down.

“Being responsible with the public finances now will mean future generations aren’t burdened with even higher debt repayments, and we can secure our economy for the long term.”

As this chart shows, UK borrowing is running ahead of forecasts this financial year (since April), and is higher than before the pandemic:

UK government borrowing
UK government borrowing Photograph: ONS

The cost of servicing UK government debt has increased considerably in recent months as inflation pushes up the interest paid to holders of RPI index linked gilts, explains Fraser Munro, public sector finance statistician at the ONS.

He’s pulled together the key points from May’s borrowing figures:

In May 2022, the public sector spent more than it received in taxes and other income, requiring it to borrow £14.0 bn, £4.0 bn less than in May last year and the third-highest May borrowing on record.
This thread provides the story behind the headlines.https://t.co/4v9zRKGQE3 pic.twitter.com/NMkVqY9bQH

— Fraser Munro (@Fraser_ONS_PSF) June 23, 2022

Central government income was £66.6 bn in May 2022, £5.7 bn more than in May last year. These receipts include £48.3 bn in taxes and £14.4 bn in compulsory social contributions (largely National Insurance payments). pic.twitter.com/EpdUOeDz11

— Fraser Munro (@Fraser_ONS_PSF) June 23, 2022

Central government current (or day-to-day) spending was £74.0 bn in May 2022, £2.2 bn less than in May last year, with a £3.1 bn rise in debt interest being offset by a £4.9 bn fall in subsidy payments. pic.twitter.com/F36imunTZm

— Fraser Munro (@Fraser_ONS_PSF) June 23, 2022

The cost of servicing government debt has increased considerably in recent months as inflation pushes up the interest paid to holders of RPI index linked gilts. OBR expect interest payments to hit £19.7 bn in June, dwarfing the previous record of £9.1 bn recorded in June 2021. pic.twitter.com/vDeIt7rAkn

— Fraser Munro (@Fraser_ONS_PSF) June 23, 2022

The additional borrowing in April has pushed the financial year-to-date total up to £35.9 bn. Although £6.4 bn less than in the same period last year, borrowing is £19.8 bn more than in the same period in pre-pandemic 2019. pic.twitter.com/ijlMpSofBr

— Fraser Munro (@Fraser_ONS_PSF) June 23, 2022

Introduction: Rising debt costs add to UK borrowing in May

Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

The UK government borrowed more than expected to balance the books last month, as rising inflation pushed up the cost of servicing the national debt.

May’s public finances, just released, show that the public sector spent more than it received in taxes and other income. This required it to borrow £14bn, £3.7bn more than the independent Office for Budget Responsibility (OBR) forecast — and ahead of City forecasts of a £12bn monthly deficit.

That’s £4bn less than a year ago, due to the drop of pandemic spending such as the furlough scheme, and Test and Trace. But it’s £8.5bn more than in May 2019, before the coronavirus (COVID-19) pandemic.

As this chart shows, it’s the third-highest May borrowing on record (after 2020 and 2021).

UK government borrowing
UK government borrowing Photograph: ONS

Tax take increased year-on-year reflecting the reopening of the economy; Value Added Tax revenues were up 10%, and Business Rates bringing in 13% more than a year ago. That helped to lift tax receipts to £48.3bn, an annual increase of £3.4bn.

But interest payments on the UK national debt jumped by 70% compared with a year earlier. Britain spent £7.6bn on debt repayments, around £3.1bn more than a year ago when it cost £4.5bn.

That’s because the payments on some UK government debt, or gilts, are linked to the retail prices index measure of inflation (which hit 11.7% last month, we learned yesterday). So as the cost of living increases, so does the interest bill on the national debt.

The ONS says:

On an accrued basis, this month saw the third highest debt interest payment made by central government in any single month and the highest payment made in any May on record.

UK borrowing
UK borrowing Photograph: ONS

May’s borrowing lifted the national debt (excluding public sector banks) to £2.36 trillion, or around 95.8% of GDP.

Michal Stelmach, senior economist at KPMG UK, warns that “debt reduction this year remains a long shot”, given Rishi Sunak’s £15bn cost of living support package will add to borrowing.

“The pace of deficit reduction is set to slow over the coming months, with the government’s latest package of cost of living measures providing a net fiscal loosening worth 0.4% of GDP in 2022-23. We expect borrowing to overshoot the OBR’s March forecast by around £20bn this year, largely on account of higher spending and weaker economic growth.

“The debt profile will depend on the economic outlook which faces acute downside risks in the near term, while rising demand for healthcare coupled with falling working-age participation could also impede fiscal sustainability. We now expect public sector debt to peak in 2023-24, missing the OBR’s March forecast by two years.

Also coming up today

New surveys of purchasing managers in the UK, eurozone and US will show whether growth is slowing this month, as worries about a possible recession rise.

Millions of UK rail passengers faced another day of disruption as this week’s second strike begins. The rail industry is asking people to only travel if necessary today, with fewer than one in five trains in Great Britain expected to run.

With UK inflation hitting a 40-year high of 9.1% last month, industrial unrest could spread as the government faces more calls for pay rises that reflect the cost of living.

The country’s biggest teaching union is warning of strike action this autumn without an “inflation plus” deal.

Norway’s central bank is expected to raise interest rates, from 0.75% to 1%, while the Central Bank of the Republic of Turkey could leave rate on hold at 14%.

The agenda

  • 7am BST: UK public finances for May
  • 9am BST: Eurozone ‘flash’ PMI survey of manufacturing and services for June
  • 9am BST: Norges Bank interest rate decision
  • 9.30am BST: UK ‘flash’ PMI survey of manufacturing and services for June
  • 11am BST: CBI distributive trades survey of UK retail
  • Noon BST: Turkish central bank interest rate decision
  • 1.30pm BST: US weekly jobless claims report
  • 2.45pm BST: US ‘flash’ PMI survey of manufacturing and services for June

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