Inflation is swelling the UK’s interest bill and forcing the government to borrow more money to pay investors, official figures released today revealed.
The amount of money the government paid to holders of UK debt jumped just over 70 per cent over the last year, reaching £7.6bn in May, up from £4.5bn last year, according to the Office for National Statistics (ONS).
The surge has been driven by an old measure of inflation – the retail price index (RPI) – accelerating to nearly 12 per cent, propelled by rising food and energy prices.
A large proportion of Britain’s debt stock is linked to the RPI, meaning payments to investors rise in line with price jumps.
However, these payments are spread over a long horizon, so they will not deal an immediate blow to the UK’s public finances.
The government borrowed £14bn in May, smashing the City’s expectations of £12bn and well above Britain’s official forecaster’s – the Office for Budget Responsibility (OBR) – projection of just over £10bn.
“Public borrowing overshot the OBR’s forecast in May primarily due to the surge in RPI inflation, which has boosted accrued payouts on index-linked debt… This accounted for all of the overshoot of total expenditure, £80.2bn, relative to the OBR’s £78.6bn forecast,” Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said.
May’s government deficit – the difference between tax revenue and spending – narrowed £4bn compared to last year, mainly the result of Covid-19 response measures such as the NHS Test and Trace programme ending.
The borrowing overshoot also indicates consumers are cutting spending in response to the cost of living reaching 9.1 per cent, its highest level in 40 years. Lower tax receipts are often caused by slowing economic activity.
Government revenue came in at “£66.6bn in May, up £5.7bn (9.4 per cent) on last year but £1.6bn (2.4 per cent) below our March forecast. The year-to-date receipts shortfall is £4.0bn (2.9 per cent),” the OBR said.
Chancellor Rishi Sunak said repairing the public finances “will mean future generations aren’t burdened with even higher debt repayments, and we can secure our economy for the long term”.