UK debt surpasses GDP for the first time since 1961

June 21, 2023 (MLN): Rocketing interest rates and inflation drove UK government debt above 100% of GDP for the first time since 1961, dealing a blow to Prime Minister Rishi Sunak’s pledge to get it falling and denting hopes for tax cuts in the build-up to an expected general election next year.

The bleak milestone was passed as spending exceeded revenue by £20 billion ($25.5bn) in May, more than private-sector economists and the independent Office for Budget Responsibility had forecast, as Bloomberg reported.

It left the budget deficit in the first two months of the fiscal year at £42.9bn– £2.1bn more than the OBR projected and almost double the same point last year.

The figures make it hard for Sunak to deliver the big tax cuts many Conservatives say are needed if the party is to avoid a defeat at the next general election.

The data from the Office for National Statistics showed the overshoot was driven almost exclusively by factors related to the inflation crisis, which has prompted the Bank of England to raise rates from 0.1% to 4.5% since the end of 2021.

Support for household energy bills in May cost £3.6bn, and inflation-indexing of benefits added £2.9bn to welfare spending.

Striking public-sector workers secured bigger pay deals than planned, with wage costs for May £3.4bn higher than last year, largely due to the National Health Service settlement.

Debt-servicing costs, which have driven up spending as galloping inflation pushed up payments on bonds tied to the Retail Prices Index, were slightly lower than a year earlier at £7.7bn. That was still £700 million more than the OBR forecast at the time of the March budget.

Spending overall was higher than forecast for May and, in a worrying sign for the growth outlook, receipts were slightly below expectations.

The EY ITEM Club said borrowing this year is now likely to be £20bn higher than the £132bn predicted by the OBR. Unless the spike in market rates reverses, the government is likely to be “in breach of its fiscal rules,” the forecasting body said.

The government had just £6.5bn of headroom against its rule that debt must be falling as a share of GDP by the fifth year of the forecast in its March budget, Bloomberg edded.

Every percentage point increase in borrowing costs adds around £20bn and market rate projections are currently around 1% higher than in March.

Chancellor of the Exchequer Jeremy Hunt said: “It would be manifestly unfair to leave future generations with a tab they cannot repay. That’s why we have taken difficult but necessary decisions to balance the books in order to halve inflation this year, grow the economy and reduce debt.”

Ruth Gregory, deputy chief UK economist at Capital Economics, said the figures “cast further doubt on the chancellor’s ability to unveil big pre-election tax cuts while still meeting his fiscal rules” and that any giveaway “may be modest or swiftly reversed.” It noted.

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