Surge in interest payments hits public debt

Public sector borrowing exceeded forecasts in May, official figures showed on Thursday, after surging inflation pushed up debt interest costs.

The Office for National Statistics said public sector net borrowing, excluding public sector banks, was £14.0bn last month, well above forecasts for £12.0bn and the third-highest May borrowing since records began in 1993.

The figure was down £4.0bn on May 2021, but £8.5bn higher than May 2019, before the pandemic. It was also £3.6bn higher than the Office for Budget Responsibility’s own forecast.

Central government receipts were £66.6bn, up £5.7bn on May 2021. Of that, £48.3bn were tax receipts, an £3.4bn annual increase.

But debt interest was £7.6bn, up £3.1bn year-on-year and £2.5bn higher than the OBR’s expectations.

It was also the third-highest debt interest payment made by any central government in any single month on an accrued basis, and the highest payment made in May on record.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: "Public borrowing overshot the OBR’s forecast in May primarily due to the surge in RPI inflation, which has boosted accrued payouts on index-linked debt.

"Looking ahead, our forecast for year-over-year growth in real GDP of 1.6% in the 2022-23 fiscal year is well below the OBR’s 2.2% projection and implies at £7.5bn uplift to public borrowing.

"We think that public borrowing will total about £130bn this year, well over the OBR’s forecast. The fiscal rules adopted by the chancellor, however, are sufficiently loose to not seriously tie his hands in 2023 and 2024, as the next general election approaches. As a result, we still think Rishi Sunak will start to cut taxes next year in an attempt to improve his party’s chances of re-election."

Martin Beck, chief economic advisor to the EY Item Club, said: "Although the May data showed government current receipts continuing to grow strongly, the rise was not as robust as the OBE had anticipated. Similarly, the fall in central government spending was less steep that the OBR expected, with the impact of very high inflation on debt interest payments a factor.

"The borrowing data is notoriously revision-prone, so this picture could change. But a further decline in the public finances looks likely as we move through the fiscal year. Growth in receipts is likely to come under increasing pressure from faltering activity.

"Still, the EU Item Club views the bulk of the upward pressure on borrowing this year to be temporary, so the implications for medium-term fiscal policy choices should be limited."

In total, the OBR expects debt interest payments will cost central government £87.2bn in the year to March 2023.

The May data were the first estimates from the ONS, which also revised up April borrowing, to £21.9bn from £18.6bn.