UK public borrowing overshot economists’ forecast last month as rising inflation pushed up the cost of index-linked public debt.
Public sector net borrowing was £20.5bn in August, £5.5bn less than in the same month last year, data from the Office for National Statistics showed on Tuesday.
Net borrowing was marginally lower than the £21.6bn forecast by the Office for Budget Responsibility, the UK fiscal watchdog, but much higher than the £15.6bn forecast by economists polled by Reuters.
Interest payments on public debt rose to £6.3bn, which was £2.9bn higher than in the same month last year and the biggest August figure since records began in 1997.
Interest payments were also much higher than the £1.6bn forecast by the OBR following a rapid rise in retail price inflation, to which many debt payments are linked. Index-linked gilts make up 25 per cent of UK government debt.
UK chancellor Rishi Sunak is planning to use next month’s Budget to set out new rules to rein in government borrowing, as the Treasury fears that higher inflation could force a rise in interest rates that would make it difficult to reduce public debt.
The Bank of England has signalled that some tightening of monetary policy may be necessary to keep inflation under control.
Commenting on the data, Sunak said: “We are determined to get our public finances back on track — that’s why we have set out the focused and responsible steps we are taking to keep debt under control.”
Public finances were much stronger than the OBR forecast for the fiscal year until July thanks to a faster-than-expected economic recovery that boosted tax revenues and limited public spending.
However, Samuel Tombs, chief UK economist at Pantheon Macroeconomics, expected “hefty” increases in the RPI to push debt interest payments this year £13.5bn higher than the OBR predicted in March. That would result in overall borrowing broadly in line with the OBR’s March Budget forecast for the rest of this fiscal year.
For the first time, the public finances figures included £21bn in allowances for government-backed emergency business loans made during the pandemic that will never be repaid. This corresponds to one-quarter of all loans and pushed up the borrowing figure for the fiscal year 2020-21.
Isabel Stockton, research economist at the Institute for Fiscal Studies, said that for the overall health of the public finances, “the precise size of last year’s historic spike in borrowing is not all that important”.
“What matters more is the strength of the eventual recovery,” Stockton said. “[This will] determine whether the chancellor can afford to top up tight spending plans in next month’s spending review to address some of the myriad challenges facing public services while remaining on course to eliminate the current budget deficit in the medium term.”
In August, central government receipts were £61.2bn, £5.3bn more than in the same month last year, reflecting increased revenues from income tax, social contribution, stamp duty and business rates as the economy continued to recover.
Despite the increased interest payments, UK central government bodies spent £79.6bn in August, £1bn less than a year ago, thanks to sharp reductions in the cost of the coronavirus job retention scheme and self-employment income support.
However, the country still registered the second-highest August borrowing since monthly records began in 1993, pushed up by more than 50 schemes that have been launched to support individuals and businesses during the pandemic.
Public sector net debt, or the borrowing accumulated over time, was 97.6 per cent of gross domestic product, the highest ratio since the early 1960s.
