UK public sector borrowing came in below expectations for June, according to fresh figures on Thursday, but was still above the Office for Budget Responsibility (OBR) forecast.
The Office for National Statistics (ONS) said public sector net borrowing, excluding public sector banks, came in at £22.9bn in June, which was below consensus expectations for £24bn, but above the OBR’s forecast for £22.3bn.
At the same time, the estimate of borrowing in the first two months of the financial year was revised down to £32.6bn, from £35.9bn.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said public borrowing was “extremely high” in June due to a record £19.4bn in debt interest payments.
He noted that accrued payouts on index-linked gilts are determined by the month-to-month increase in the retail price index (RPI) two months earlier, with the RPI jumping by 3.4% on that basis in April as the energy price cap leapt.
“While the Treasury only needs to stump up the cash when the index-linked gilts are redeemed – the average maturity of the index-linked gilt stock is 18 years – the huge figure surely will be used by [Rishi] Sunak to argue that tax cuts must wait until after inflation has fallen back,” Tombs said.
“Indeed, RPI inflation likely will surge again in October, when the energy price cap will jump, boosting interest payments in December.
“In addition, both gilt yields and the market-implied path for Bank Rate are higher now than when the OBR produced its forecasts in March.”
As a result, Pantheon estimated that debt interest payments would total £104bn in 2022-2023 – £21bn more than the OBR anticipated.
“Granted, high inflation also is supporting central government current receipts, which came in at £70.5bn in June, just £0.1bn below the OBR’s forecast, even though real GDP is struggling.
“But the surge in inflation also will trigger a substantial rise in the value of most benefits, including the state pension, in April.
“Meanwhile, the Chancellor’s £14bn package of measures to support households’ incomes in the second half of this calendar year was funded only partly by a £5bn windfall tax on energy companies.”
On the government’s current policies, Tombs said public borrowing would likely total about £130bn this year – well above the OBR’s £99bn forecast.
“If Mr Sunak becomes the next prime minister, we should probably expect only a limited further package of measures to support households this winter.
“But the outlook for public borrowing will rise further if [Liz] Truss wins.”
Her proposal to reverse April’s 1.25 percentage point increase in National Insurance contributions would cost £6.5bn in 2022-2023, if implemented in October, and £13bn in the year afterwards.
Additionally, her pledge to suspend green levies on energy bills would cost a further £4.3bn, if implemented in October, and £8.5bn a year on an ongoing basis, Pantheon predicted, while her plan to cancel next April’s sharp rise in corporation tax would boost borrowing by about £17bn next year.
“We doubt that these tax cuts could be even half-funded by spending reductions elsewhere, suggesting that the chances of the government eventually running a current budget surplus in the mid-2020s, as currently planned, would be remote under a Truss premiership.”
Reporting by Josh White at Sharecast.com.