UK debt interest payments jump to all-time high

UK interest payments on government debt jumped to the highest level on record last month in a sign of the limited fiscal space available for tax cuts.

The increase in interest payments also pushed public sector borrowing above last year’s level for the first time this year.

Debt interest payments rose to £19.4bn last month, £10.3bn more than in June last year and the highest since records began in 1997, the Office for National Statistics said on Thursday.

A quarter of the UK’s government debt is index-linked, so the cost of servicing it is pushed up by inflation, which is running at a 40-year high.

Interest payments last month were about double the previous record in June 2021, reflecting soaring prices over the past year as well as temporary factors including the ways debt payments are accounted for.

The data came the day after Tory MPs voted former chancellor Rishi Sunak and foreign secretary Liz Truss on to their shortlist of two candidates to become the UK’s next prime minister.

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June’s figures “may well be a warning shot to the incoming prime minister, whoever they may be, that the space for fiscal giveaways may be constrained by servicing existing debt”, said Sandra Horsfield, economist at Investec.

Samuel Tombs, economist at Pantheon Macroeconomics, said Sunak would use the debt data to argue that tax cuts must wait until after inflation has fallen back. But Truss has proposed tax cuts, meaning “the outlook for public borrowing will rise further if [she] wins,” Tombs said.

Chancellor Nadhim Zahawi said: “We recognize that there are risks to the public finances including from inflation, with debt interest costs in June more than double the previous monthly record.”

The Office for Budget Responsibility, the UK fiscal watchdog, had forecast interest payments would rise to £19.7bn in June — slightly more than the actual figure — before dropping to £3.9bn in July.

Isabel Stockton, research economist at the Institute for Fiscal Studies, said that while June’s surge was partially due to “accounting quirks”, rising inflation is resulting in the highest debt interest payments relative to national income since the 1980s.

Inflation rose to 9.4 per cent in June and the Bank of England expects it to reach 11 per cent later this year when the energy regulator updates the energy bill cap in October to reflect soaring electricity wholesale prices.

With interest payments resulting in government spending rising by £9bn from last year, public sector net borrowing was £22.9bn in June, £4.1bn more than in the same month in 2021 and the second-highest June borrowing since monthly records began in 1993 .

This is despite significant savings from the end of most coronavirus support schemes and higher tax receipts resulting from a strong labor market and the increase in the national insurance contribution rate.

Borrowing was marginally higher than the £22.3bn forecast by the OBR in March.

High inflation and the economic rebound from the pandemic have increased government receipts over the past year. However, soaring prices are now pushing up public expenditures including state pensions, public sector pay and the value of most benefits. Prolonged high inflation also limits economic growth, affecting receipts.

Ruth Gregory, economist at Capital Economics, said the June borrowing figures gave “a timely reminder to the next prime minister, Sunak or Truss, that the public finances are weaker than the OBR’s forecasts suggest”.

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