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Government interest bill hits highest ever level for a January

Boris Johnson Visits Hospital In Kent
The amount the government spent on servicing its debt hit £6.1bn last month, up £4.5bn over the last year, according to the Office for National Statistics (ONS) (Photo by Gareth Fuller - WPA Pool/Getty Images)

The government’s interest bill swelled to its level ever for a January since records began in the late 1990s as inflation burns a hole in the UK’s public finances.

The amount the government spent on servicing its debt hit £6.1bn last month, up £4.5bn over the last year, according to the Office for National Statistics (ONS).

Soaring inflation has ramped up government spending on interest payments due to a large proportion of the UK’s stock of debt being linked to an old measure of the cost of living.

Coupon payments to investors holding index-linked gilts rise in line with the retail price index, which last month hit its highest level since 1991.

Spending on interest payments for the year so far is 80 per cent higher compared to the same period a year ago at £57.8bn. 

The UK’s interest bill is also nearly £2.5bn more than forecast by the Office for Budget Responsibility (OBR) last October.

The cost of servicing the country’s stock of debt is set to rise even further due to the Bank of England launching an anticipated rate hike cycle over the course of 2022 and inflation potentially breaching eight per cent this April.

Chancellor Rishi Sunak warned of the need to put the public finances on a more sustainable course to offset exposure to higher debt servicing costs.

“Our debt has increased substantially and there are further pressures on the public finances, including from rising inflation,” he said.

“Keeping the public finances on a sustainable path is crucial so we can continue helping the British people when needed,” Sunak added.

Despite the ballooning interest bill, borrowing has been slashed over the last year as a result of the economy rebounding better than expected from the Covid-19 crisis.

In the first ten months of the financial year, the government borrowed £140bn less than over the same period last year. 

Better than expected tax receipts caused by economic activity and the labour market steaming ahead meant the government borrowed £17.8bn than forecast by the OBR.

However, spending was £8.6bn above the OBR’s projections.