Government borrowing swelled by £2 billion last month as higher inflation after Britain’s vote to leave the European Union lifted interest payments on the national debt.
The budget deficit was larger than expected in June, hitting £6.85 billion and the jump of almost 43 per cent on the previous year surpassed City forecasts of about £4.8 billion.
Overall public sector net borrowing, excluding taxpayer-backed banks, now stands at £22.8 billion since the start of the financial year in April, according to the Office for National Statistics. This is £1.9 billion higher than where it stood a year ago.
The 9 per cent rise in the deficit makes the task faced by Philip Hammond much harder. Before last month’s general election the Conservatives pledged to balance the government’s books “by the middle of the next decade”, handing the chancellor a little more leeway after a previous pledge to run a surplus by 2019.
A 33 per cent increase in spending on debt interest in the year to June, taking it to £4.9 billion, helped to widen the deficit. Over recent months inflation has lifted the cost of index-linked bonds for the government. Increased payments to the EU and larger purchases by the government also contributed.
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Britain’s debt pile now stands at a £1.62 trillion, or 81 per cent of its gross domestic product, having risen by £41.9 billion over 12 months.
A Treasury spokesman said: “Today’s release shows that our national debt, at £65,000 for every household, is still too high and leaves us vulnerable to any future shocks. That is why we have a credible fiscal plan to get debt falling and deliver the sound public finances needed for a stronger economy and higher living standards.”
It comes only a week after the government’s spending watchdog warned that with debt higher than it was before the banking crisis the UK was now “much more sensitive” to higher inflation and interest rates. In its Fiscal Risks report the Office for Budget Responsibility also warned that the government’s fiscal targets “would be missed by a large margin”.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, argued that higher government spending was the key factor behind rising borrowing. “The jump in borrowing in June primarily reflects a £4.6 billion, or 8.3 per cent, year-over-year leap in central government current expenditure,” he said. “Although spending rose in most areas, a £1.2 billion increase in interest payments and £0.8 billion rise in contributions to the EU’s budget, partly to correct for underpayments in previous years, were to blame for the particularly strong growth.”
John Hawksworth, PwC’s chief economist, called it a “modest deterioration in public finances” last month. “The general pattern is consistent with the OBR’s March forecast that we might see some increase in the budget deficit this financial year, as the economy slows and some one-off favourable factors from last year unwind,” he said.
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Analysis
Philip Hammond faces a “double whammy” of slowing growth and rising inflation amid growing calls for greater public spending (Callum Jones writes).
Economists described how the chancellor’s task of eliminating the budget deficit over the next decade was becoming harder.
Philip Shaw, chief economist at Investec, said that higher interest payments were “set to be an ongoing factor in the public finances” over the year. Noting that the OBR estimates that each 1 per cent increase in inflation costs the government another £4.1 billion in debt interest, he told clients: “Our inflation [RPI] forecasts show a 2.4 percentage point rise over 2017-18 as a whole, implying higher interest payments of £9.8 billion. This is before the cost of servicing this year’s deficit and any changes from rolling over maturing debt.”
Alan Clarke, head of European fixed-income strategy at Scotiabank, suggested that the “frontload of tax receipts last year” was in part responsible for last month’s rise. “We shouldn’t be too worried that borrowing is going up, not down,” he said.
The figures highlighted “the fact that the public finances are far from healthy,” Howard Archer, chief economic advisor to the EY Item Club, said.
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“Rising public dissatisfaction with austerity and the public sector pay cap is exerting pressure on the government to recalibrate fiscal policy.”