UK government borrowing fell in June as the reopening of the economy after the lockdown resulted in higher tax revenues despite a record increase in debt interest payments to Â£ 8.7bn amid a backdrop of rising inflation.
The Office for National Statistics (ONS) said the government’s budget deficit – the deficit between spending and income – reached Â£ 22.8bn in June, a decline of Â£ 5.5bn sterling compared to the same month a year earlier.
However, the latest snapshot revealed the impact on public finances of rising inflation, with interest payments on public debt rising by more than 200% to reach Â£ 8.7bn, the level highest monthly on record since 1997.
Raising interest payments on debt is likely to become a goal of Rishi Sunak after the surge in government borrowing during the Covid-19 pandemic pushed debt to levels not seen since the 1960s.
However, there is also good news for the Chancellor in the June borrowing figures. With consumer spending surging sharply as consumers flocked to stores, pubs and restaurants after the lockdown reopened, tax revenue has risen by around 20% from the same month a year ago .
Overall public borrowing was lower than the forecast of Â£ 25.5 billion for the month made by the Office for Budget Responsibility (OBR) in March.
The UK has also made its first payment to the EU under the Â£ 800million withdrawal deal with Brussels, with similar payments due in the coming months.
The ONS said the fluctuations in interest on debt were largely due to an increase in the retail price index, a measure of inflation, to which index-linked government bonds are indexed, after a sharp rise. increase in recent months.
Some economists warn Britain’s economy is threatened by spike in inflation amid supply bottlenecks and booming demand for goods and services as Covid-19 restrictions are relaxed. However, others, including the Bank of England, have said the recent inflationary surge is likely to be temporary.
The RPI jumped to 3.9% in June, the highest level in three years, as the prices of food, used cars, clothes and shoes, meals and drinks, as well as gasoline and diesel increased. However, much of the rise was due to the reversal of the price collapse a year ago during the first wave of Covid-19.
The ONS said the additional funding required by the government for coronavirus support programs, combined with lower tax revenues and the record economic slowdown, pushed public sector debt to Â£ 2.2 billion at the end of the day. June, or about 99.7% of GDP – the highest ratio since 1961.
Sunak said the government would continue to support businesses and jobs, but added: “However, it is also right that we make sure that the debt stays under control in the medium term, and that is why I made difficult choices in the last budget to put public finances back on a sustainable path.
The UK recorded the fourth highest increase in government borrowing among 35 major economies last year, after experiencing one of the worst recessions in the group and suffering one of the highest coronavirus infection rates .
Earlier this month, the OBR warned that rising debt levels and inflation posed a growing risk to the government, estimating that the cost of servicing the national debt from an increase in ‘one percentage point in interest rates was six times higher than before the 2008 financial crisis and almost double what it was before the pandemic.
Despite setting a new monthly record, annual debt interest payments have fallen to historically low levels in recent years. Even though the national debt has reached the highest GDP ratio since the 1960s, service costs are at their lowest level in 320 years. In March, the OBR predicted spending on interest on debt to hit Â£ 24.8bn this year, down Â£ 13bn from its estimate for 2021-2022 before the pandemic.
The public finances snapshot comes as Sunak plans to increase national insurance contributions to fund social protection reforms, ahead of the delayed launch of the Treasury expenditure review.
The Institute for Fiscal Studies think tank said the Chancellor was set to cut public services worth up to Â£ 17 billion a year despite growing demands for funding in several areas and the costs of Covid-19.