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UK Government Borrows More Than Expected as Debt Costs Surge

·3 min read

(Bloomberg) -- The UK government borrowed more than forecast in May after a 70% surge in interest payments to service the national debt.

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The budget deficit stood at £14 billion ($17.2 billion), £2 billion higher than economists had forecast. Overall government spending was higher than the Office for Budget Responsibility predicted in March, and receipts lower.

Higher interest rates and inflation boosted the money the Treasury spends to service its debt to £7.6 billion, the most for any May on record, from £4.5 billion a year earlier. The OBR is forecasting a surge to £19.7 billion in June.

“Rising inflation and increasing debt interest costs pose a challenge for the public finances, as they do for family budgets,” Chancellor of the Exchequer Rishi Sunak said in a statement. “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.”

The overall deficit was down from £18 billion in the same month of 2021, when the economy was still emerging from a third coronavirus lockdown. That improvement reflects the ending of pandemic-era spending programs, a buoyant labor market and tax increases that took effect in April.

Inflation poses a direct threat to the public finances because a quarter of all government bonds is tied to the retail-prices index, which surged 11.7% in the year through May. Bank of England interest-rate increases to tame inflation add to the cost.

Fears are growing that the economy may already be in recession after the BOE last week estimated the economy shrank in the second quarter. A slump or a period of stagnation would hit tax revenue, making it harder for Sunak to bring down borrowing as planned.

The deficit, which soared to 14.5% of GDP during the year of the pandemic, fell to 6.1% in 2021-22. In March, the OBR predicted a further decline to 3.9% in the current fiscal year but that projection is now looking optimistic.

A cost of living package announced by Sunak last month means the deficit is already on course to be £10 billion higher than his fiscal watchdog forecast, and the chancellor is under pressure to do more to help those struggling to keep up with the fastest inflation in 40 years.

Rail workers are striking this week to demand better pay, and there are concerns that industrial action could spread to the whole of the public sector. The government wants to hold settlements to 2% or 3%. However, on Wednesday it announced a £10 billion increase for pensioners next year, in a sign of the pressure it is under.

Worse Than Forecast

Borrowing in April was £3.3 billion higher than previously estimated. It means the total for the first two months of the fiscal year was £35.9 billion, £6.4 billion higher than the OBR predicted and more than double what it was in the same period of 2019 –- a year before the pandemic.

The budget shortfall in the financial year that ended in March was revised down by almost £1 billion to £143.7 billion. That’s still well above the £128 billion that was forecast by the OBR, though the figure is likely to fall further as new spending data come in.

(Adds revisions)

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