Interest payments on UK government debt hit one of the highest levels last month as rising inflation limited the expected fall in public sector debt.
Interest costs rose to £ 7.6 billion in May, well above last year’s figure and higher than the £ 5.3 billion forecast by the Office for Budget Responsibility, after a rapid rise in retail price inflation to which many debt payments are linked.
The National Statistics Office said debt interest payments were the third highest made by the UK central government in a single month and the highest payment made in May.
Inflation raises the cost of government lending because declines linked to the retail price index account for 25% of UK public debt.
Official data released on Wednesday showed that the RPI rose at an annual rate of 11.7% in May, the fastest pace since December 1981.
However, net public sector debt declined in May, but less than expected, as inflation also helped government finances increase tax revenues.
Debt in May was £ 14bn, £ 4bn less than the same month last year, according to ONS data released on Thursday. But May’s debt was in excess of the £ 12 billion projected by economists surveyed by Reuters and well above the £ 10.3 billion projected by the OBR.
The strong labor market and the reopening of the economy also increased government revenues. In May, government revenue rose by £ 5.7 billion, including an annual increase of £ 3.4 billion in tax receipts.
Samuel Tombs, an economist at Pantheon Macroeconomics, noted that even government revenue exceeded OBR forecasts, especially for consumer tax revenue. This may suggest “that the economy is below the OBR’s expectations,” he said.
Debt was also revised for April. This means that public finances for the current fiscal year “have had a disappointing start,” said Martin Beck, chief financial adviser to the EY Item Club.
Chancellor Rishi Sunak said: “Rising inflation and rising debt interest costs are a challenge for public finances, as they are with family budgets.”
He added that “being responsible for public finances now will mean that future generations will not be burdened with even higher debt repayments, and we will be able to secure our economy in the long run.”
The increase in interest payments was also partially offset by the end of most Covid-19 government support schemes.
Public sector net debt, or accumulated debt over time, was 95.8% of gross domestic product, the highest ratio since the early 1960s.
This year’s debt figures do not yet include the £ 15bn package of government measures announced last month aimed at supporting households with rising energy bills.
Michal Stelmach, senior economist at KPMG UK, said “the pace of the deficit reduction will slow down in the coming months” as a result of the government’s latest package of support and weaker economic growth. “This year’s debt reduction is still a long way off,” he added.
“Revenue growth is likely to be under increasing pressure from faltering activity,” Beck said.
Official data showed that the economy had stopped growing since January.
Tombs estimates the public loan will amount to about £ 130bn this year, well above the £ 99bn forecast of the OBR. However, he predicted that Sunak would start reducing taxes next year “in an attempt to improve his party’s chances of re-election.”