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Inflation surge pushes up Britain's budget deficit

Published 21/07/2022, 07:13
Updated 21/07/2022, 11:56
© Reuters. FILE PHOTO: People walk through the financial district of Canary Wharf, London, Britain 28 September 2017. REUTERS/Afolabi Sotunde

© Reuters. FILE PHOTO: People walk through the financial district of Canary Wharf, London, Britain 28 September 2017. REUTERS/Afolabi Sotunde

By Andy Bruce and William Schomberg

LONDON (Reuters) - A surge in debt costs - pushed up by soaring inflation to twice their previous monthly peak - added to Britain's budget deficit in June, which was its highest since April 2021, data showed on Thursday.

The Office for National Statistics said public sector net borrowing excluding state-owned banks rose to 22.879 billion pounds ($27.4 billion) last month from 12.560 billion pounds in May.

A Reuters poll of economists had pointed to a deficit of 23 billion pounds.

The figures showed Britain racked up debt interest of 19.4 billion pounds in June alone, more than double the previous record.

Graphic: GRAPHIC-UK racks up record debt interest bill in June-https://fingfx.thomsonreuters.com/gfx/polling/movanadxrpa/Pasted%20image%201658385594487.png

The ONS said the leap in debt costs reflected a big April increase in the retail price index gauge of inflation, which is the benchmark for index-linked government bonds.

The uplift applied in June to these linkers - which represent roughly a third of the stock of British government bonds - was 16.7 billion bounds.

Over the first three months of the 2022/23 financial year starting in April, Britain has borrowed 55.4 billion pounds.

While this is 5.7 billion pounds less than over the same period last year, it represents a roughly 3.6 billion pounds overshoot versus forecasts made in March by the Office for Budget Responsibility watchdog.

The OBR warned that with inflation expected to peak even higher than previously thought, further spikes in debt spending were on the cards.

"With several external forecasters now predicting that the CPI measure of inflation could reach 12% in October – over 3 percentage points higher than the peak in our March forecast – further significant upside surprises in debt interest spending can be expected through the year," the OBR said.

Ruth Gregory, senior UK economist at Capital Economics, a consultancy, said the overshoot of the deficit compared to the OBR's forecasts "may limit the ability of the next Prime Minister to provide more relief for households."

The balance between tax and spending has been hotly debated between the two remaining candidates in the race to replace Boris Johnson as prime minister.

Foreign Secretary Liz Truss has promised immediate tax cuts, something the other contender, former finance minister Rishi Sunak, says risks fuelling inflation.

© Reuters. FILE PHOTO: People walk through the financial district of Canary Wharf, London, Britain 28 September 2017. REUTERS/Afolabi Sotunde

In response to the data, finance minister Nadhim Zahawi said he recognised there were risks to the public finances, including from high inflation which struck a 40-year high last month.

($1 = 0.8338 pounds)

Latest comments

Nick Wade, Yes, PM responsible for the department that overspend should be sacked. Rishi has been given our money to people on benefit and encouraging people not to to work extra hours by increasing benefits. Also pension credits should not be paid to anyone that has not paid enough NI and those that have not been in this country more than 50 years.
Quite, I completely agree with you Fred, that is what I tell people; compare our Government to a private company......it is OUR money, they should pay for their incompetance; however all Civilservants are personally protected from their mistakes.....if a private company CEO decides on the wrong course of action, then they suffer financially
Boris buffoon's legacy
Tell me how you can tell people to save money and be careful with your money when the government waste so much money. Over spend over pay themselves. Give to much money away to over countries. What a mess, if i ran my company like this i would be taken to court a long time ago
Well done Sunak!
It is clear that if Bank of England raises borrowing costs, UK will get caught in a debt trap due to spiralling interest costs. Bank of England hence needs to go slow on using the blunt tool of interest rate hikes as this will possibly kill or cripple the patient and instead let skilled diplomats find a way to ease energy prices which are largely responsible for the inflation malaise.
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