UK Government Debt Costs Jump by Nearly 40 Percent Amid Soaring Inflation

UK Government Debt Costs Jump by Nearly 40 Percent Amid Soaring Inflation
Undated file photo showing Sterling notes and coins. (Dominic Lipinski/PA Media)
Alexander Zhang

Interest payments on UK government debt has jumped by almost 40 percent year-on-year as state borrowing increases at a much faster pace than expected, official data show.

According to the latest figures from the Office for National Statistics (ONS), UK government borrowing hit £4.9 billion ($5.8 billion) in July, significantly exceeding the £2.8 billion predicted by economists and bringing the total budget deficit for the year so far to £55 billion ($65 billion).

Government debt interest payments climbed to £5.8 billion ($6.9 billion) in July, up from £3.5 billion in the same month last year due to increases in Retail Price Index (RPI) inflation.

Earlier this week, the ONS revealed that RPI had risen to 12.3 percent, while the broader Consumer Price Index (CPI) inflation figure hit a new 40-year high of 10.1 percent.

Higher Spending

July’s borrowing was £0.8 billion below levels from the same month in 2021, but represented a £5.9 billion surge from pre-pandemic levels in 2019.

Compared with July 2021, the central government's current expenditure increased by £3.4 billion to £76.5 billion, with a £2.3 billion increase in debt interest and a £2.8 billion increase in net social benefit payments being partially offset by a £1.5 billion reduction in subsidy payments.

Public sector net debt excluding public sector banks was £2,388.1 billion at the end of July 2022, around 95.5 percent of gross domestic product (GDP), which was an increase of £188.4 billion or 1.4 percentage points of GDP compared with July 2021.

The Office of Budgetary Responsibility (OBR) said the budget deficit has fallen year on year, but it was still £3 billion above its March forecast profile, largely reflecting higher spending.

“Sharp rises in inflation continue to raise debt interest costs by even more than our forecast assumed,” it said.

Pressure on Public Finances

Commenting on the latest figures, Chancellor Nadhim Zahawi said: “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.”

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

Michal Stelmach, senior economist at KPMG UK, said the latest figures will mean “tough choices” for the next chancellor following the Conservative leadership election.

“The balance of risks to public finances has clearly shifted to the downside,” he said.

“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.”

PA Media contributed to this report.