Government borrowing: Another new debt record as interest hits July high making pre-election tax cuts unlikely
The interest paid on government debt hit its highest July level on record as government borrowing continued to rise, albeit significantly less than expected.
According to figures from the Office for National Statistics, the government had to pay £7.7bn in interest in July, £1.5bn more than last July and the highest July level since records began in April 1997.
More positively for the government, total borrowing in July came in at £4.3bn, which was lower than the £6.0bn predicted by the Office for Budgetary Responsibility (OBR) meaning the government’s fiscal position is stronger than expected.
The ONS estimates that so far the government has borrowed £56.6bn in the first four months of the fiscal year, which was less than the £68bn forecast by the OBR.
The stronger performance came thanks to better than expected tax receipts, which were £3.9bn more than last year.
The OBR said that the” surpluses against the March profile do suggest stronger-than-anticipated nominal tax bases, such as wages and salaries, nominal consumer spending and profits.”
However, this was still £13.7bn higher than the same period last year. July’s £4.3bn was the fifth highest level of July borrowing on record.
Government debt in total came to £2.6trn, or around 98.5 per cent of the UK’s GDP.
Chancellor of the Exchequer, Jeremy Hunt said: “As inflation slows, it’s vital that we don’t alter our course and continue to act responsibly with the public finances.
“Only by sticking to our plan will we halve inflation, grow the economy and reduce debt,” Hunt continued.
The figures will be closely scrutinised to see whether Hunt has any space for pre-election tax cuts. Although the government borrowed less than expected, most experts argued tax cuts would not be possible without breaking the Chancellor’s fiscal rules.
Ruth Gregory, deputy chief UK economist at Capital Economics, said “with interest rates still rising and a mild recession on its way, we continue to think the Chancellor will struggle to unveil a large package of permanent tax cuts in the Autumn Statement while still adhering to his fiscal rules.”
Hunt’s current targets are to have the debt to GDP ratio falling and make sure borrowing does not exceed three per cent of GDP in five years
Gregory highlighted the increasing cost of borrowing thanks to rising gilt yields as a major constraint on the Chancellor.
Britain’s public finances have become much more imbalanced due to a series of shocks hitting its economy over the last 15 years.
Banking crises in 2008, Brexit, the pandemic and Russia’s invasion of Ukraine have all raised public borrowing and squeezed growth.
Before the financial crisis, debt as a share of GDP was a little over 35 per cent.
Economists have warned that the Bank of England’s efforts to tame inflation by raising interest rates could balloon the UK’s debt servicing bill over the coming years.
A large chunk of the UK’s debt pile is also tied to an old measure of inflation known as the retail price index, which has taken off over the last two years, raising the debt servicing bill. Consumer price inflation fell to 6.7 per cent in July, a faster than projected fall.