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UK government borrowing hits £4.9bn as inflation bites

·Business Reporter, Yahoo Finance UK
·2-min read
UK government borrowing LONDON, ENGLAND - AUGUST 14: A daughter carries an umbrella with her mother to protect herself from the afternoon sunshine as they walk across Westminster Bridge next to the Houses of Parliament and Big Ben on August 14, 2022 in London, England. After a prolonged period of dry weather, some parts of the southern UK are facing drought conditions, prompting hosepipe bans and other water-conservation measures. (Photo by James D. Morgan/Getty Images)
UK government borrowing reached £4.9bn in July, ahead of expectations. Photo: James D Morgan/Getty

Interest payments on UK government debt surged almost 40% last month as runaway inflation continued to take its toll.

According to the latest data from the Office for National Statistics (ONS), government borrowing reached £4.9bn ($5.8bn) in July, ahead of expectations.

Analysts had forecast £2.8bn for the month, however, the figure now brings the total budget deficit for the year so far to £55bn, which is £3bn more than forecasts.

But, borrowing was £0.8bn less when compared to the same month a year ago.

While tax income was higher, the deficit was driven up by debt servicing costs, which surged 81% from last year.

Debt interest payments also climbed to £5.8bn during the period, rising from £3.5bn in the same month last year due to increases in Retail Price Index (RPI) inflation.

Read more: FTSE muted amid fresh wave of concern over UK economy

A quarter of government debt is tied to RPI, which surged to its highest since 1981 last month.

“I know that rising inflation is creating challenges for families and businesses, and it is also putting pressure on the public finances by pushing up the amount we spend on debt interest,” chancellor Nadhim Zahawi said.

“To help people during this difficult time, government support is continuing to arrive in the weeks and months ahead, targeted to those who need it most, like pensioners, people on low incomes, and those with disabilities.

“We are taking a balanced approach: safeguarding the public finances while providing significant help for households.”

Watch: How to prevent getting into debt

The downbeat figures add to pressure on Conservative leadership contenders Liz Truss and Rishi Sunak, who have vowed to cut taxes despite surging public borrowing.

Truss has pledged to reverse April’s national insurance tax increase and cancel next year’s rise in corporation tax, while Sunak has offered to cut VAT on energy bills and a series of reductions in the basic rate of income tax.

“The two candidates for prime minister need to recognise this even greater-than-usual uncertainty in the public finances,” the Institute for Fiscal Studies (IFS) said.

Read more: UK consumer confidence hits rock bottom as prices soar

“Additional borrowing in the short term is not necessarily problematic — and indeed may be appropriate to fund targeted support. But significant permanent tax cuts would, unless matching spending cuts can be delivered, certainly increase the chances that the government fails to meet its own manifesto commitments on borrowing.”

Meanwhile, Michal Stelmach, senior economist at KPMG UK, said: “The balance of risks to public finances has clearly shifted to the downside.

“The cost of living crisis will likely require further support to households, while a slowing economy will put downward pressure on receipts, making the fiscal targets ever less achievable.”

Watch: How does inflation affect interest rates?