UK borrowing increases by more than expected due to higher debt bill

Inflation, which has remained stubbornly high, is forcing the government to increase its debt interest payments.

The Office for Budget Responsibility, an independent government watchdog, has forecast that the borrowing of the public sector in July was 25.6 billion pound sterling, compared to 13.7 billion pound sterling the previous month.

In March, the OBR projected that borrowings would be £22.4 billion by April due to higher government investments. Last month, independent economists projected a number closer to £18billion.

Office for National Statistics stated that it was the second largest April borrowing in history, only surpassed by the one in 2020, when the pandemic was at its height. The Office for National Statistics said the increase in borrowing was due to the increased cost of energy subsidies, the higher payments of benefits, and the increasing cost of servicing debt.

Last month, interest on debt was £9.8bn. This is the highest figure for April ever recorded and £3.1bn higher than in the same month of last year.

The government service its index-linked borrowing costs based on the Retail Prices Index measure of Inflation. This was higher than expected at 13,8% in February.

The public finances improved more than expected in the past year. This is because the economy avoided a recession, and the robust labour market increased tax revenues, and decreased government spending on benefits.

The ONS has said that it estimates borrowings for the financial period ending in 2022-2023 at £137 billion. This is less than the £152 billion forecast by the OBR.

The ONS reported that the debt ratio in April was 99.2 percent of GDP, a marginal increase from March.

The government has pledged to reduce the total national debt, as a percentage of the economy, within five years. This is a major plank in the chancellor’s efforts to stabilize the public finances following last year’s mini-budget.

Jeremy Hunt stated: “It was right that we borrowed billions of dollars to protect families and business against the impact of the pandemic, and Putin’s Energy Crisis. Debt and borrowing are still too high, which is why we’re working to reduce them. We have taken the difficult but necessary steps to balance our nation’s budget. If we stick to our plan, and grow our economy, debt will fall.

Moody’s Investor Service said this week the chancellor will meet his target of getting the debt ratio to fall to around 90% by 2028. However, they warned that borrowings would rise again until the middle of the 2040s due to the ageing population and the need to spend more on public services.

Evan Wohlmann, a Moody’s analyst, said that the population ageing would lead to an increase in healthcare and retirement spending as a percentage of GDP starting from 2030. The fiscal deficit is expected to increase to 5% of GDP in 2040 from the average deficit of 4.8 % during the decade preceding the pandemic.

Ruth Gregory, Capital Economics’ deputy chief UK economist, said that April’s figures on public finances had a bad start to the fiscal year. We doubt that this will stop the chancellor embarking on an extravagant fiscal spree ahead of the next elections.

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