Interest payments on UK government debt hit one of the highest levels on record last month as rising inflation limited an expected fall in public sector borrowing.
Interest costs rose to £7.6bn in May, well above the figure for last year and higher than a £5.1bn forecast from the Office for Budget Responsibility, following a rapid rise in retail price inflation to which many debt payments are linked.
The Office for National Statistics said the debt interest payments were the third highest made by the UK central government in any single month and the highest payment made in any May on record.
Inflation lifts government borrowing costs because gilts linked to the retail price index make up 25 per cent of UK government debt.
Official data released on Wednesday showed that the RPI rose at an annual rate of 11.7 per cent in May, the fastest pace since December 1981.
Public sector net borrowing nonetheless declined in May — but by less than expected — as inflation also aided government finances by bringing in higher tax revenues.
Borrowing in May was £14bn, down £4bn from the same month last year, according to ONS data published on Thursday. But May’s borrowing was higher than the £12bn forecast by economists polled by Reuters and well above the £10.3bn expected by the OBR.
The strong labour market and reopening of the economy boosted government income too. In May, government receipts rose by £5.7bn, including a £3.4bn annual increase in tax receipts.
Samuel Tombs, economist at Pantheon Macroeconomics noted that even government receipts undershot the OBR forecasts, particularly for consumption tax revenues. This may suggest “that the economy is underperforming the OBR’s expectations,” he said.
Borrowing for April was also revised up. This means that the public finances for the current fiscal year “have got off to a disappointing start,” said Martin Beck, chief economic advisor to the EY Item Club.
Chancellor Rishi Sunak said: “Rising inflation…
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