Britain’s debt has exceeded the size of its economy, for the first in over six decades. This is ahead of an anticipated rise in interest rates which will increase borrowing costs by billions.
According to the Office for National Statistics, The Office for National Statistics reports that an NHS pay agreement and soaring benefit payments helped drive public borrowing up to its highest level outside of lockdown in May.
The UK debt now exceeds the size of its economy annually for the first since March 1961, following the Second World War.
After official data revealed that the rate of inflation in May was 8.7pc, up from 6.8pc during April, it is expected that Bank of England will raise interest rates to 4.75pc.
The underlying price increases, which exclude volatile food and energy prices, reached a 31-year record high of 7.1%. Investors bet on interest rates hitting 6pc by the end of the year after this shock. Two-year gilt yields also spiked.
Capital Economics’ Jonas Goltermann said that the “UK inflation mess” was becoming an outlier in advanced economies.
He said: “Core inflation has accelerated in the UK, but is still below target in the US.
The 10-year yield has increased sharply over the past few weeks . In fact, long-term gilt rates are now above US Treasury yields. This is the first time this has happened since the financial crisis of 2008.
The ONS reported that the rising cost of living was due to an increase in air travel prices, theatre and cinema tickets, and used cars.
The inflation rate of food prices has slowed but remains stubbornly high. Food costs are up 18.3pc over the past year.
Retail prices index (RPI), no longer an official measure of inflation, but still used for calculating increases in rail fares and mobile phone tariffs, as well as interest on around one-quarter of UK debt, has risen by 11.3% in the past year.
According to the ONS, the Government borrowed £20bn in May to cover the difference between tax receipts versus public expenditure.
The borrowings in May are more than twice as high as the £9.4bn in the same period a year earlier. They are also the second-highest since the monthly records began, in 1993. Only the first Covid Lockdown in May 2020 is higher.
ONS attributed the increase in borrowing to increases in benefits, such as the state pension, universal credits and child benefit. These all increased by 10.1pc last April, in order to keep up with the rising cost of living. Net social benefits reached £22.9bn in April, which is £2.9bn more than the previous year.
The ONS stated: “This rise was due to the inflation-linked benefits increasing.”
Two one-off NHS awards, as well as the Office for Budget Responsibility’s (OBR) tax and expenditure watchdog, are also to blame for the increase in the borrowing figure for May.
The overall debt increased due to a payment of £9.8bn from the Treasury to Bank of England, to cover the losses on the massive bond-buying program as interest rates rose.
The OBR has forecast that borrowings for the first half of this year will be £2.1bn more than the £40.8bn predicted by the OBR. Nevertheless, borrowings for the previous year are currently £18.3bn lower than what the OBR predicted back in March.
The UK’s debt now exceeds 100pc, but it is still 1.3 points below what the OBR predicted in March. This is partly due to inflation driving up the size of the cash economy.
In May, debt interest was at £7.7bn. Economists say the recent increase in gilt yields suggests that the government’s debt service bill will continue to rise.
If current predictions of interest rates hitting 5.75pc prove accurate, Samuel Tombs believes that the rapid increase in UK borrowing costs leaves “no room for tax cuts before elections”
If the OBR republished its estimates based upon current bond yields, and interest rate expectations, he estimates that it will have to increase its forecast for interest payment by nearly £40bn alone in 2024/25.
Tombs, who has an election scheduled for next year, said that it is more likely than not that the Conservatives would have to enter the next general elections, which will be held in January 2025, with a promise of lower taxes.