Public debt is skyrocketing to almost £ 9bn per month
The SE government paid nearly £ 9bn in interest on the national debt last month, a record high, raising fears the cost of Covid could get out of hand.
The public sector’s net borrowing – the deficit – was £ 22.8 billion in June. That’s well below official forecasts, as the economy is rebounding faster than expected and £ 5.5bn less than the same month a year ago as the pandemic raged.
But the £ 8.7bn cost of servicing the national debt alone, up from £ 2.7bn a year ago, raised eyebrows in the city. This figure is the highest since records began in 1997.
The increase was caused by a rise in the retail price index, triggering an increase in interest payments on inflation-indexed debt.
The RPI jumped to 3.9% in June from a year ago in June, from 0.5% in the summer of last year. While the Bank of England is targeting the Consumer Price Index, which has seen smaller increases, part of government debt as well as student loans and rail fares track the RPI.
Britain’s debt stands at £ 2.2 trillion, just under 100% of GDP. About a quarter are linked to inflation indices.
Michal Stelmach, Senior Economist at KPMG UK, said: “The volatility of interest expenditure on debt underscores its sensitivity not only to inflation but also to interest rates, which can quickly change the course of fiscal sustainability. .
Tax increases now seem inevitable.
Samuel Tombs, Macroeconomics, said: “The government will need to increase corporate taxes and increase the effective tax rate by freezing existing thresholds.
Interest payments on debt are unlikely to fall as inflation rises and interest rates are expected to rise at some point.
Ruth Gregory of Capital Economics said: “While debt servicing costs are likely to remain higher than the estimated OBR over the next several years, public finances should continue to reap the benefits of a faster and longer recovery. more GDP than the OBR forecasts, meaning the deficit is expected to decline even faster. That said, we suspect the Chancellor will “cash in” any improvement in the deficit rather than cut tax hikes and spending cuts planned to hit the economy. At least by 2022/23, the economy is expected to be strong enough to cope with it. “
Chancellor Rishi Sunak said: “I am proud of the unprecedented support program we have put in place to protect jobs and help thousands of businesses survive the pandemic, and that we continue to support those who have it. need.
“However, it is also right that we ensure that debt remains under control over the medium term, and that is why I made some tough choices in the last budget to put public finances back on a sustainable path.”
The Institute for Fiscal Studies estimates Treasury borrowing could be £ 30bn lower in the current fiscal year than the £ 234bn forecast in the March budget.
This windfall will not persist because of the permanent damage to the economy from the pandemic and the rising interest costs of debt. He also estimates that health, education and transport need at least an additional £ 10bn over each of the next three years.
Isabel Stockton of IFS said: “Borrowing remains very high, and the extent to which lower borrowing this year will translate into lower term borrowings is very uncertain.”