Charlene Young, senior pensions and savings expert at AJ Bell, examines the latest public sector finance figures, which show government borrowing fell sharply in June as tax receipts strengthened and debt servicing costs eased, although public debt remains close to 95% of GDP.
“A sharp drop in public sector borrowing gives new chancellor John Healey a welcome tailwind on his first full day in the job. The government is adding less to its debt pile, which eases some of the immediate pressure on the public finances.
“But it’s important not to overstate the improvement. Much of the reduction reflects lower inflation-linked debt interest costs rather than a fundamental transformation in the health of the UK’s finances. Borrowing over the first three months of the financial year was £2.7 billion more than the OBR’s forecast and still among the highest levels seen since records began over the same period. And the overall cost of servicing government debt means interest costs are still running at £11.8 billion for the month.
“The June figures provide some additional breathing room ahead of difficult spending and tax decisions. But ongoing pressure on public services and the need to support long-term economic growth mean the underlying challenges facing the public finances have not gone away.
“Healey will be acutely aware that the international backdrop remains highly uncertain. The conflict in the Middle East has seen fresh strikes from both the US and Iran which could reignite inflationary pressures and spike borrowing costs.
“The direction of travel is encouraging, but one month’s figures are unlikely to change the broader picture. The prime minister has an ambitious list of policy aims for his new cabinet but has continued his pledge to honour the fiscal rules in Labour’s manifesto.”
